The Hidden Credit Squeeze: Why Consumer Debt Markets Are Flashing Red
The silent unraveling beneath the surface of financial markets isn’t in equities or government bonds it’s in the consumer credit complex. This is where the real stress is showing, and few are paying attention. Let’s break it down before the headlines catch up.
What’s Happening Right Now?
•Prime Auto Loans Are Cracking:
We’re no longer just talking about subprime borrowers. Prime auto loan delinquencies and net loss rates are surging. This means even middle-class, traditionally creditworthy consumers are starting to fall behind on payments. Historically, this only happens when household balance sheets are severely stressed.
•Student Loan and Credit Card ABS Deterioration:
Recent data shows rising delinquencies and net loss rates in student loan and credit card-backed securities. Despite years of forbearance programs and fiscal support, the consumer is running out of room. Debt servicing is becoming a real issue, and defaults are climbing.
•Shadow Banks Under Pressure:
Non-bank lenders who have been the main liquidity providers for consumer credit markets are now facing their own funding stress. These are the modern-day equivalents of the mortgage lenders who collapsed before the 2008 crisis. When they pull back, credit availability tightens dramatically.
⸻ Where Are We in the Historical Cycle?
This is the 2006–2007 phase of the last crisis all over again, but this time it’s centered around consumer credit rather than housing.
•Back then, early warnings came in the form of MBS (Mortgage-Backed Securities) downgrades.
•Today, it’s Fitch and S&P flagging deteriorating conditions in Auto, Student Loan, and Credit Card ABS.
•The “Managed Pool Cumulative Gross Default” chart shows that post-COVID credit vintages are already performing worse than most historical cohorts. That’s a flashing red warning light for what comes next.
⸻ Why This Matters for the Markets
•Credit Contraction Is Here:
As ABS collateral deteriorates, lenders are pulling back. Expect tighter credit card lending, tougher auto loan approvals, and reduced availability of consumer financing. This will have knock-on effects across consumer-dependent sectors like retail, autos, and discretionary goods.
•ABS Market Liquidity Is Drying Up:
Many believe “investment-grade” ratings provide protection. That’s a dangerous myth. As underlying collateral deteriorates, these investment-grade tranches become illiquid and subject to forced selling. This is how liquidity crises begin slowly, then all at once.
•What Comes Next?
If defaults continue rising, forced liquidations of ABS portfolios will accelerate. That will push financial conditions tighter, even without the Fed hiking rates. And don’t forget consumer spending drives 70% of U.S. GDP. If credit freezes up, recession risks rise dramatically.
⸻ Could This Narrative Be Wrong?
Only if there’s a major fiscal or monetary intervention something equivalent to a consumer credit bailout. But with political dysfunction and sticky inflation still a concern, don’t count on policymakers acting preemptively. Historically, they wait for the crisis to hit the front pages before stepping in.
⸻ Bottom Line:
This Is a Consumer Credit Crisis in the Making We’re witnessing the early stages of a credit event that could spread beyond ABS markets into the broader economy. Watch for rising delinquencies, shadow bank failures, and a tightening credit environment that forces policymakers back into crisis mode.
Stay alert. This is how systemic fragility builds quietly, then violently.
