When JPMorgan Chase (JPM) Jamie Dimon warns markets, investors should listen. In the firm’s shareholder letter, Dimon said that the leveraged private credit market had increasing risks.
Dimon said that the private credit market is around $1.8 trillion in size. That is bigger than the high-yield (“junk”) bond market. Despite the comparable size, private credit is only a small percentage of the $13 trillion investment-grade bond market, along with the mortgage market.
Weak Credit Standards
Credit standards weakened modestly. Corporations used their earnings for add-backs. They also relied on weaker covenants. Together with payment-in-kind structures, borrowers had a way to delay their cash interest.
After the government posted strong job data for March amid an inflationary environment, bond yields rose. Debt markets are pricing in the risk of the central bank raising interest rates by 25 bps. Even though a rate hike is low, keeping rates the same would increase risk premiums.
Investors need to watch out for credit spreads widening. That would put pressure on borrowers. It might require regulators, especially in the insurance industry, to raise their capital buffers.
Insurance stocks like Prudential (PRU) and AIG are on a downtrend, though shares rebounded recently. Chubb (CB) trades close to a yearly high, bucking the trend.
Credit card stocks like Visa (V) are unable to break out of a downtrend. Fintech companies like SoFi (SOFI) are also struggling. Block (XYZ) is range-bound while PayPal’s (PYPL) stock is stuck in a trading range at $45 - $46.
