From the Federal Reserve's semiannual financial stability report
Headlines via Reuters:
- finds measures of vulnerability for businesses and households have largely returned to pre-pandemic levels
- says default rates on leveraged loans have fallen to below pre-pandemic levels as average credit quality improved
- says leverage at banks and broker-dealers remained low, but still high at life insurance companies and "somewhat elevated" for hedge funds
- overall credit quality of bank portfolios improved "broadly" over first half of year, though delinquency rates for commercial real estate loans and other pandemic affected industries "remained elevated"
- says little evidence of eroding mortgage underwriting standards or speculation as house prices continue to rise
- funding risk low at banks though "structural vulnerabilities" persist at some money market funds and for stablecoins
- liquidity risks at life insurers at post-2008 highs and increasing, with increased exposure to "risky and illiquid" assets
- contacts cited worsening of virus, fast rise of interest rates and stress in china's real estate sector among top near-term financial risks
- says expiration of government support programs and pandemic uncertainty still pose significant risks to households
- roughly 70% of market participants surveyed by fed cited "persistent inflationary pressures," monetary tightening as a chief risk to financial stability, more than cited coronavirus
The Fed also pointed to meme stocks and the growing use of stablecoins as issues to attend to.
There is plenty to worry about (see points above) but equity markets continue to shrug off concerns. Bond markets at present are more volatile and may be indicating trouble ahead, but how many times have you heard this?
