The US leveraged loan market has recently reached a turning point. The streak of over 4% default rates for 22 consecutive months officially ended in November, with the default rate dropping to 3.7% that month. This number sounds good, but the story behind it is much more complex.

To put this wave of defaults into perspective—its duration is twice as long as the economic recession during the 2020 pandemic. However, there is a somewhat reassuring point: the peak default rate in this cycle did not exceed 5%, far below the 8% recorded during the 2009 financial crisis.

But don’t get too excited. Looking at the five-year cumulative default rate reveals more—this year it has already risen to 16%, almost matching the 17% level in 2012. What does this mean? It indicates that the severity of the problem is not as optimistic as it appears on the surface.

More importantly, the market itself has been expanding rapidly. Since 2012, the size of the US leveraged loan market has tripled, now reaching a historic high of $2 trillion. The larger the market, the wider the impact of risk spillovers.

Investors are paying the price for this cycle, with huge losses becoming a reality. For the entire financial market, this is still a warning sign that should not be ignored.