Not so long ago, families, businesses and governments were effectively living in a world of free money.
And there’s a lot of debt out there: According to the Institute of International Finance, a record $US307 trillion was outstanding in the first half of 2023.Economies, especially the US, have proved more robust than anticipated. That, along with the previous dollops of easy money, is keeping the fire lit under inflation, forcing central banks to jack up rates higher than once thought and, more recently, stress that they’ll leave them there for a while.
The mortgage-cost squeeze is a story playing out everywhere. In the US, the 30-year fixed rate has surpassed 7.5 per cent, compared with about 3 per cent in 2021. That more-than-doubling in rates means that, for a $US500,000 mortgage, monthly payments are roughly $US1,400 extra.Higher rates mean countries have to shell out more to borrow. In some cases, a lot more.
One metric under close scrutiny is the equity risk premium, the difference between the earnings yield of the S&P 500 index and the 10-year Treasury yield, which is a way of gauging the attractiveness of stocks versus other assets. That stands near zero, the lowest in more than two decades, implying that stock investors aren’t being rewarded for taking on any additional risk.
The changed world will also be a test for some of the newer corners of funding, such as private credit, which has yet to show how it would handle corporate defaults.Higher rates have negatively impacted banks’ willingness to back large mergers and acquisitions over the last 18 months, with lenders fearful of being left with debt on their books that they can’t sell on to investors.
The other option is to sell properties into a falling market, creating more downward pressure on prices and in turn causing more trouble for finances.