For professional investors, the year 2007 remains a chilling reminder. It marked the abrupt end of a long era of stable growth and low inflation, ushering in the catastrophic global financial crisis. Alarmingly, current signals from the world's credit markets are evoking uncomfortable parallels to that fateful period, suggesting a dangerous level of complacency may have set in.
Market Priced for Perfection, Reality Shows Cracks
The clearest warning sign is the dramatic compression in risk premiums. The spread between yields on corporate bonds and US Treasuries has recently fallen to its lowest level since 2007. Specifically, junk bonds are offering spreads of just 2.8 percentage points, a figure far below the two-decade average of 4.5 points. In an extraordinary twist, bonds from top-tier firms like Microsoft now sometimes yield less than US government debt. This pricing implies that investors perceive the risk of financial disorder to be near historic lows.
This optimism persists despite clear signs of strain. Two significant bankruptcies in September 2025 exposed underlying vulnerabilities. On September 10th, sub-prime auto lender Tricolor Holdings filed for bankruptcy amid fraud allegations from creditor Fifth Third Bank. On September 28th, car-parts maker First Brands followed suit, revealing a complex web of liabilities exceeding $10 billion. An internal probe is investigating whether the firm repeatedly used the same customer receivables to secure multiple loans, leaving investors like Jefferies and Millennium Management facing substantial losses.
The Opaque Boom in Private Credit
Assessing the true risk in corporate lending has become notoriously difficult due to the explosive growth of alternative markets. America's private credit market, valued at roughly $1.6 trillion by the end of 2024, now rivals the size of the public junk-bond market. This sector ballooned after traditional banks retreated from risky lending post-2008, with new institutions chasing high returns in opaque, less-regulated spaces.
This shadowy expansion has led to extraordinarily complex financial arrangements, often beyond the full view of regulators. The health of this market is now in question. Data from investment bank Lincoln International indicates that 11% of private-market firms are now using "payments-in-kind" (deferring interest for IOUs), up from 7% in late 2021. Furthermore, creative debt restructurings are masking true distress, keeping official bankruptcy figures artificially low.
The unease is reflected in the performance of Business Development Companies (BDCs), which invest in private credit. An index of listed BDCs is down 7% for the year, including dividends, signalling a loss of investor confidence.
Economic Weakness and the Spectre of Contagion
Underlying economic pressures are adding fuel to the fire. Stress is evident among poorer consumers, a canary in the coal mine. The share of automotive debt delinquent for 90 days or more hit 5% in Q2 2025, a five-year high. Sales of lorries, a key indicator of retail and industrial health, have plummeted from a post-pandemic peak of 553,000 (annual rate) in May 2023 to just 422,000 in August 2025—the lowest in five years. A creeping unemployment rate and the yet-to-be-felt full impact of America's highest tariffs since the 1930s compound these worries.
The potential fallout from a credit slump is no longer confined to large Wall Street firms. Private credit funds have marketed products to smaller investors, including retirement accounts, while banks and insurers have increased their exposure. While rating agency Fitch notes these links are not yet large enough to threaten the entire financial system as in 2007, widespread damage is still possible. A sell-off in one sector, like the 2015-16 oil price crash, can quickly ripple through to other risky assets.
The fundamental danger for investors today is a skewed risk-reward balance. With spreads at historic lows, the potential compensation for taking on risk is minimal. As Oksana Aronov of JPMorgan Asset Management starkly puts it, "In fixed income, when spreads are at all-time tights, it's a matter of when, not if. You don't want to be picking up the nickels in front of that steamroller." The market's pursuit of perfection may be setting the stage for a painful reckoning.
