In his latest Flow Show note, BofA CIO Michael Hartnett - the most vocal bear at Bank of America - made an important observation, pointing out that at a time when virtually everyone - including the Fed - is expecting a soft landing, the hard landing “tells” are lining up: the yield curve is steepening from -110bps to -67bps, unemployment rate up 3.4% to 3.8%, personal savings rate up 3% to 4-5% YTD, and maybe most importantly, HY defaults are up 1.6% to 3.2%, credit card delinquencies are jumping from 0.8% to 1.2%, while auto delinquencies are surging up 5.0% to 7.3%.
It's not just one of the market's most outspoken bears, however, that sees lots of pain dead ahead - some of Wall Street's most prominent investors are also jumping on the credit default cycle bandwagon, to wit: Apollo’s James Zelter is "skeptical" of an economic soft landing. Ares co-founder Michael Arougheti is also concerned about the risk of a fiscal accident, while Joshua Easterly of Sixth Street Partners and hedge fund manager Hamza Lemssouguer both are confident that defaults will rise (sharply) in coming years as riskier debt comes due for refinancing.
Speaking at the Bloomberg Global Credit Forum in London last week, these titans of the debt world warned of looming headwinds and widespread defaults as the impact of higher interest rates slowly filters through to consumers and companies as some $4 trillion in investment grade and HY debt has to refinance at sharply higher rates in just 2023 and 2024.
