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Illustration: Aïda Amer/Axios

The K-shaped recovery happening in the broader U.S. economy, where the wealthy are seeing their fortunes rise while the poor see theirs fall, also is happening in credit markets, analysts at S&P Global say.

What it means: The pace of overall credit rating downgrades has slowed from earlier this year, but negative outlooks are at historical highs, and defaults could double within a year.

  • Some sectors — like technology, consumer staples, retail essentials, homebuilders and health care — appear likely to navigate the coronavirus pandemic with little or no effect on their creditworthiness.
  • Others face a "bleaker" future and are not expected to see credit ratings recover until at least 2023 — like the auto, leisure, travel, and aerospace industries.

What they're saying: "Downgrades have come down from their peak, but negative outlooks are at historical highs both for nonfinancial corporates (37%) and banks (30%) globally, pointing to more rating actions ahead."

  • "Since the outbreak of the pandemic, credits at the lower end of the scale (‘B’ and below) have represented over half of the downgrades, while 90% of defaults were from credits in the ‘CCC’ category."
  • "We forecast the speculative-grade corporate default rate to double by June 2021, from the current 6.2%, to 12.5% in the U.S. and from 3.8% to 8.5% in Europe."

Between the lines: A record $4.5 trillion worth of corporate bond issuance has come to market year to date, 29% higher than this time last year, and analysts are urging caution as fears of renewed market volatility pushed many corporates to front-load bond issuance ahead of the U.S. elections.

  • The analysts also noted a return of "aggressive financial policies" such as the use of debt by private equity owners to finance dividend payments for themselves paid for by using entities under their ownership to take on potentially unsustainable debt.

What to watch: There is also worry that U.S. election uncertainty in early November and the failure of the EU and U.K. to reach a Brexit agreement by the end of the month could create volatility and constrain access to financing for vulnerable firms.

Go deeper

Dion Rabouin, author of Markets
Dec 14, 2020 - Economy & Business

A growing debt crisis that predates the pandemic will complicate the world's recovery

Data: Institute of International Finance; Chart: Danielle Alberti/Axios

A major issue that will complicate any potential recovery is the extreme level of debt corporations and governments around the world have built up, much of it predating the pandemic.

By the numbers: To dig themselves out of the hole COVID-19 created, governments and corporations have added significantly to their already heavy debt loads.

Dion Rabouin, author of Markets
May 6, 2020 - Economy & Business

The Fed now has the world's largest balance sheet

Reproduced from BofA Global Research; Note: Banks included are US Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Bank of China and Reserve Bank of Australia; Chart: Axios Visuals

By the end of this year, analysts at Bank of America Global Research estimate the Fed's balance sheet will have risen to nearly $10 trillion and the world's six largest central banks will have taken their holdings from around $15 trillion to $25 trillion worth of assets.

The big picture: The Fed now has the largest balance sheet of all central banks, having surpassed the European Central Bank and Bank of Japan.

Republicans pledge to set aside differences and work with Biden

President Biden speaks to Sen. Mitch McConnell after being sworn in at the West Front of the U.S. Capitol on Wednesday. Photo: Erin Schaff-Pool/Getty Images

Several Republicans praised President Biden's calls for unity during his inaugural address on Wednesday and pledged to work together for the benefit of the American people.

Why it matters: The Democrats only have a slim majority in the Senate and Biden will likely need to work with the GOP to pass his legislative agenda.