Financial news

Then, in the second half of March, the shutters reopened and both borrowers and lenders rushed back in. All told, investment-grade issuers sold $103bn of debt in March—around last year’s monthly average, despite the week-long hiatus. For such issuers, yields have fallen, and “the market’s wide open”, says Lotfi Karoui of Goldman Sachs, a bank. “The market really hasn’t embraced the idea that [the events of March] will morph into a financial crisis.” By the end of the month, even the riskiest issuers were again able to raise debt.

Yet even if the risk of a crisis seems to have passed, borrowers still face a squeeze. The most obvious source of pressure is the Federal Reserve, which since March last year has raised its interest rate from close to zero to between 4.75% and 5%. For the firms that have borrowed $1.5trn in loans, which tend to have floating interest rates, the increase has quickly translated to higher debt-servicing costs. For issuers of high-yield bonds, who have borrowed a similar amount and tend to pay fixed interest coupons that only rise when the bond is refinanced, the full effect is yet to be felt. Although the market expects interest rates to be cut by a percentage point this year, the median Fed governor projects an end-of-year rate of above 5%. The more the threat of a financial crisis fades, the more likely the Fed’s forecast is to prove correct.

Banks were reluctant to lend even before svb fell. Mike Scott of Man Group, an asset manager, notes that by the end of 2022 surveys already showed lending standards had tightened to levels that, in previous business cycles, preceded recessions. Last month’s ructions, which in America focused on small and midsized banks, are likely to have turned the screws further.

Analysts at Goldman Sachs estimate that banks with less than $250bn in assets account for 50% of commercial and industrial lending, and 45% for consumers. For small firms employing 100 people or fewer, the figure rises to 70%. It is these businesses—which employ more than a third of America’s private-sector staff and produce a quarter of its gross output—that will be most sensitive to the forthcoming credit squeeze. Peter Harvey of Schroders, another asset manager, predicts that the outcome will be “stronger covenants, higher [interest] spreads, lower issuance volumes, smaller borrowing sizes and tighter controls on lenders’ sectoral exposure”.