U.S. Credit Delinquencies Rise Amidst Overheating Bond Market, Signaling Financial Strain

Escalating Consumer Delinquencies Point to Growing Financial Strain

U.S. consumer finances show increasing signs of stress as delinquencies across various credit categories have reached multi-year highs. Data from the New York Federal Reserve Bank and Equifax indicate that credit card accounts 90+ days delinquent climbed to 12.27% in the second quarter of 2025. This marks a 14-year peak, just 1.4 percentage points below the all-time high observed in Q2 2011. This figure represents a sharp increase from 10.93% a year prior.

The distress extends beyond credit cards. Subprime auto loan delinquencies rose to 9.3% in August, nearing the critical 10% mark often considered a leading economic indicator. Furthermore, 10.2% of student loan debt is now delinquent, a figure likely exacerbated by the recent resumption of repayments. These trends collectively suggest a deteriorating financial picture for a significant segment of U.S. consumers.

Overheated Credit Markets and Bond Valuations Raise Systemic Concerns

While consumer balance sheets face pressure, the broader U.S. credit market exhibits signs of overheating. Corporate bond valuations have reached historic highs, with the spread on investment-grade bonds falling to 0.74 percentage points in September, the lowest level since 1998. High-yield bond spreads are approximately 2.75 percentage points, close to the historic low set in 2007.

This aggressive pursuit of corporate debt has led to record issuance, with investment-grade companies selling $210 billion worth of bonds in September alone, marking the busiest September on record. Analysts, including those at Barclays, have expressed concern that markets are "priced for perfection," likening the situation to "the walls are closing in from all sides." This confluence of high valuations and emerging stress signals suggests potential vulnerabilities if market conditions shift.

Differentiated Impact on Financial Institutions and Industries

The rising tide of delinquencies and an overvalued credit market create a bifurcated landscape for financial institutions and specific industries. Companies like Visa (NYSE:V), operating as a payment network provider rather than a direct lender, possess a structural advantage. Its diversified revenue, low operational costs, and substantial cash reserves provide a buffer against direct loan defaults, though a broad economic downturn could impact transaction volumes.

In contrast, institutions with direct exposure to consumer credit health face heightened risks. Capital One (NYSE:COF), with its significant credit card portfolio, is particularly vulnerable to escalating default rates, making it a less attractive investment in the current environment. The struggles of CarMax (NYSE:KMX), evidenced by a substantial miss on Q2 2025 earnings and increased loan loss provisions in its auto finance arm, highlight broader headwinds in the used car market and tightening lending standards.

Regional banks are also identified as particularly vulnerable, especially those with substantial exposure to Commercial Real Estate (CRE) loans, with $957 billion in CRE loans maturing in 2025. Smaller financial institutions face risks from liquidity shortages and less diversified portfolios.

Broader Context and Policy Responses

The current environment of rising delinquencies aligns with a "K-shaped recovery," where overall credit card delinquency rates mask increasing strain on subprime borrowers. Subprime delinquency rates remain elevated at 6.93%, driven by high annual percentage rates (APRs) exceeding 24% and persistent inflation. In response, banks have tightened subprime lending, with the subprime share of credit card originations by large banks decreasing from 23.3% in Q1 2022 to 16.4% in Q1 2025. The net charge-off rate for credit cards, while seeing a slight Q2 2025 decrease to 4.29%, remains significantly above pre-pandemic levels.

Central banks and governments possess macroprudential tools, such as capital requirements and loan-to-value (LTV) limits, to mitigate risks from credit bubbles. These policies aim to safeguard the financial system by preventing excessive lending and inflated asset prices. The Federal Reserve's updated monetary policy statement now reaffirms a strict 2 percent inflation rate target, a shift from prior considerations of averaging inflation over time, which may influence future interest rate decisions and broader credit conditions.

Outlook: Vulnerabilities and Resilience

Looking ahead, several sectors are deemed vulnerable to a "higher-for-longer" interest rate environment and tightening credit conditions. These include Commercial Real Estate, Private Credit markets, High-Yield Corporates, and industries like Basic Materials, Technology, and Telecoms, which are expected to show increased default risk by mid-2025. Consumer industries, burdened by rising debt and slowing spending, also face pressure.

In contrast, Major and Systemically Important Banks maintain a more stable outlook due to strong balance sheets, high liquidity, and robust risk management. The Healthcare sector and the UK Services Industry also exhibit resilience. Investors are advised to closely monitor delinquency trends, the pace of charge-off increases, and the agility of banks in adjusting underwriting standards amidst the Federal Reserve's cautious approach to rate cuts.