The high level of US leveraged loan default rates continues: risk warnings and market transmission logic

The default rate of US leveraged loans (Leveraged Loans) has exceeded 4% for 22 consecutive months, matching the record set during the 2008-2009 financial crisis, and the trend is still ongoing. From a historical perspective, such high default rates exceeding 4% have only occurred three times: the first two during the financial crisis and the COVID-19 pandemic in 2020. We are currently in the third instance—what is worth noting is that in the first two cases, a recession was triggered. The core concern is not the absolute level of the monthly default rate, but the prolonged duration of the high default state. This indicates that the current credit issues are not caused by a one-time liquidity shock but are the result of sustained pressure from a high-interest-rate environment on corporate cash flows and refinancing capabilities—this long-term stress warning is far more significant than short-term fluctuations. The primary target of leveraged loans is companies with weaker credit profiles and higher debt ratios, which are also the most sensitive to interest rate changes within the entire credit system. When the default rate of such assets remains high for an extended period, it often indicates that companies can no longer achieve self-repair through operational improvements or refinancing, and can only passively deplete existing cash flows, making the trend of credit deterioration difficult to reverse. Unlike the 2008 financial crisis, this round of risk has not initially impacted the banking system but is concentrated in private equity, collateralized loan obligations (CLOs), and non-bank credit systems. The risk has not manifested as a concentrated outbreak but is being released gradually and in a dispersed manner. This also explains why macroeconomic data appears relatively stable on the surface, while credit pressures continue to accumulate—this dispersed risk release pattern delays direct impacts on the macroeconomy but does not eliminate hidden dangers. According to economic cycle laws, credit is always a leading indicator. When the leveraged loan default rate remains high for a long time, corporate investment, mergers and acquisitions, and capital expenditures tend to be suppressed, and this suppression effect will gradually transmit to employment and consumption sectors. Therefore, the current default data does not mean the economy has entered recession, but clearly signals that if high interest rates persist, the probability of economic downturn will continue to rise. In simple terms, if the Federal Reserve does not adjust the high-interest-rate environment, the risk of economic slowdown or even recession will significantly increase. Against this backdrop, market pricing of risk assets will become more stringent, and investment strategies that do not rely on market direction but focus on cash flow stability and structural yields will gain higher market weight. The current popularity of the AI sector is a typical example—its high prosperity drives sales growth, improves financing environment, and expands market space, precisely aligning with the current market’s core demand for “certainty of returns.” In contrast, cryptocurrencies like Bitcoin are more dependent on liquidity support and are less capable of generating stable cash flows, making them more sensitive to liquidity changes and policy adjustments. However, I still believe that Bitcoin has a strong correlation with technology stocks—if not, its price might have already halved.