Deutsche Bank strategists caution that as expectations for Federal Reserve rate cuts are pushed further out, the resulting higher borrowing costs are set to pressure U.S. companies more acutely.
So far, default activity has been mostly limited to distressed debt exchanges, often with relatively high recovery rates—thanks in part to ongoing hopes for a soft economic landing. But Deutsche warns that persistent inflation, elevated policy uncertainty, and rising sovereign bond term premiums are eroding those hopes.
In this environment, the bank sees rising default risk among speculative-grade issuers, forecasting the default rate could climb to 5.5% by mid-2026. If realized, that would mark the highest issuer-weighted default rate for lower-rated U.S. corporate debt since 2012.
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