Bankruptcies are spiking as companies lose hope of rate cuts
- April saw the highest number of corporate bankruptcies in a year, S&P Global said.
- Eroding bets of an interest rate cut contribute to this, as burdened business throw in the towel.
- Inflationary data prints in April coincided with a jump in junk-rated yields.
Corporate bankruptcies increased in recent months amid teetering confidence in a quick interest rate pivot.
According to S&P Global, April marked the highest number of bankruptcies in a year, with 66 filings. That’s an 88% increase from January’s 35 filings.
Contributing to the increase were challenged expectations that the Federal Reserve could slash the fed fund rates, which has stood at 5.25%-5.50% since last July. Though 2024 opened with high hopes that easing would start as soon as March, strong economic and inflationary data has since pushed outlooks to as far as December.
For many corporations burdened by high rates, that has meant throwing in the towel, S&P suggested. After all, hawkish policy has been the central headwind for eroding balance sheets last year, and businesses have hinged their survival on lower borrowing costs.
By one measure, rising costs did slow when a rate cut looked likely in early 2024. Effective yields on junk-rated corporate debt hit as low as 7.40% in March, according to the ICE BofA US High Yield Index.
But last month’s stubborn inflation and slowing GDP made a Fed cut look unlikely, and yields shot up to 8.11%.
The three sectors leading in bankruptcies that month were consumer discretionary, healthcare, and industrials, S&P Global said.
While April’s stagflation scare has subsided following a weaker-than-expected jobs report, Fed officials continue to signal that lower inflation prints are still necessary before an interest rate cut can occur.
But analysts have warned that the longer monetary policy remains unchanged, the greater the risk of something breaking in the economy.
“Now that we’re back to an environment where we’re losing those embedded rate cuts, we actually have to increase the chance of something bad happening here,” Frances Donald, Manulife Investment Management’s chief economist, said in April.
