Warning of Credit Crisis More Than Rising Interest Rates

Credit spread is the first indicator to move when the market collapses, reflecting the market's characteristic of breaking down from its weakest link. While rising interest rates are clearly a burden on the market, falling credit indicators are interpreted as a sign that interest rate issues are still manageable.

However, at that time, inflation was severe, but there were no serious credit issues. This suggests that whether credit issues are involved, rather than the interest rate level itself, is a key variable determining the market's interest rate limit.

During the dot-com bubble, market adjustments began when the 10-year yield was around 6.7-6.8%. In contrast, during the financial crisis, the market collapsed significantly even with interest rates in the early 5% range. This implies that if credit problems are involved, even a 5% interest rate can be fatal to the market. The current market must closely monitor the accompanying credit crisis along with rising interest rates.

During the 2007 subprime crisis, prime mortgage rates were in the high 6% range. However, an additional 3-5% interest rate was added to subprime loans with lower credit ratings, so the actual interest burden for low-credit borrowers exceeded 10%. It was not a simple surface interest rate of 5%, but the perceived interest rate that directly caused the collapse.

The 2008 financial crisis originated from lower credit tiers, such as subprime mortgage borrowers. Rather than a 5% interest rate being the sole problem, it was significant that a specific credit group was hit by rising interest rates. Currently, there are no clear signs of a credit crisis similar to the past in the market.

If US Treasury yields fall but high-yield bond spreads surge, this is interpreted as an important signal of a stock market crisis. Therefore, when Treasury yields turn downwards, it is essential to check whether credit spreads rise simultaneously.

During the 2008 subprime crisis, despite deteriorating key indicators, the market tended to overlook them, trapped in economic optimism. To determine whether a temporary market rebound is a fleeting opportunity or a prelude to a downturn, credit spread indicators must be examined. The relevant data is publicly available and easily accessible to anyone.

Despite the upward trend in US Treasury yields, credit spreads are actually falling. This suggests that current market risks are minimal, unlike past crisis periods such as the 2008 financial crisis or the COVID-19 pandemic. Therefore, it is unreasonable to classify the current market as a full-blown downturn.

Unlike past financial crises, most mortgages in the US have now switched to fixed rates. Especially, many secured long-term fixed-rate mortgages during the ultra-low interest rate period, so the impact of interest rate hikes on the private sector is relatively less. This is an important structural defense factor that shows a different state of private credit compared to the subprime crisis.

This suggests that the current market assesses that it can withstand a 5% interest rate level.

Warnings about risks in US Treasury investments have been raised multiple times over the past 1-2 years. There is a high probability that the high-interest rate structure will become entrenched due to continuous fiscal deficits. Therefore, rather than interest rates falling, high interest rates are expected to be maintained at a level where 'problems do not erupt'.

If the economy is sacrificed, both the US stock market and the domestic stock market will not be able to avoid a certain degree of adjustment. Rising oil prices leading to reduced consumption could also curb interest rate upward pressure.

These complex factors are likely to entrench a high-interest rate environment globally. Therefore, a high-interest rate trend is expected to continue for the foreseeable future.

A one-time interest rate hike can even serve as an opportunity for the market to adapt and resolve uncertainty.

However, these entities have higher credit ratings and greater capacity to withstand crises than past subprime borrowers. Therefore, even if interest rates fall, it is essential to check whether credit problems are emerging to accurately assess market risk.

In other words, at least for now, while interest rate levels are certainly a burden on the market, signs of a credit crisis have not yet appeared. Short-term market adjustments are possible, but it is difficult to say that the upward trend in the US stock market has completely ended.