Despite showing resilience, the US economy is still at risk of recession, warn experts. In April, there was a sharp increase in corporate bankruptcies, the highest in a year, according to S&P Global. This rise is partly due to diminished expectations of an interest rate cut, which has caused struggling businesses to give up hope.
Inflation in April also coincided with higher yields on junk-rated bonds. The increase in bankruptcies is a result of decreased confidence in a rapid interest rate adjustment. S&P Global reported that there were 66 corporate bankruptcies in April, an 88% increase from January.
The anticipation of a Fed rate cut, which has not yet happened despite hopes, has caused businesses to struggle with high borrowing costs. The expectation of easing monetary policy has been a lifeline for companies with weak finances, and without a rate cut, some have had to file for bankruptcy. Rising costs and interest rates have contributed to this trend, causing bond yields to fluctuate.
The three sectors with the most bankruptcies in April were consumer discretionary, healthcare, and industrials. While concerns of stagflation have decreased since April, the Federal Reserve remains cautious about reducing interest rates due to stubborn inflation. Analysts have warned that maintaining current monetary policy could lead to negative consequences for the economy. Without a change in interest rates, the risk of economic instability increases, according to Frances Donald, the chief economist of Manulife Investment Management.