Rising Rates Spark Fears of Minsky Moment

The recent surge in long-term interest rates has sparked concerns about a potential Minsky moment, where the credit and asset markets experience a sharp downturn.

Rising interest rates can lead to higher borrowing costs for individuals and businesses, making it difficult to service debt. This can result in increased defaults, which can spread throughout the financial system.

The $2 trillion private credit market is particularly vulnerable, with Fitch rating agency warning of a 6% default rate in July. Meanwhile, the Federal Reserve has reported an acceleration in withdrawals from private credit funds, forcing them to impose redemption caps.

High interest rates could also pose a challenge for the AI investment boom, which has accounted for around one-third of US economic growth over the past year. The maintenance of high interest rates, coupled with high energy costs, may raise questions about the economic rationale for some of this investment.