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Bankruptcy Boom: Cause for Alarm or Just a Business Reset?

It’s not every day that the word “bankruptcy” feels like the buzz around the business water cooler. With corporate bankruptcies this year soaring to levels unseen since 2010, it’s making headlines again. This year, the tally is at 402, nearly doubling the figures of 2022, and several familiar names like Bed Bath & Beyond and Party City are on the list.

The end of almost-zero interest rates has been a pinch. As the 10-year US Treasury yield reached its highest since 2007, borrowing became a costly affair for companies already skating on thin ice.

However, before you hit the panic button, Carson Group’s global macro strategist, Sonu Varghese, assures investors there are a few rays of sunshine in this gloomy forecast. Here’s the lowdown:

1. The Bond Market: Unruffled and Chillin’

Ordinarily, bankruptcy talks make the bond market jittery, especially when defaulting debts are in the mix. However, the bond scape seems tranquil, even for those picking up the riskier below-investment-grade debts.

Varghese notes that when the bond market is stressed about defaults, bond yield spreads often rise. Today’s spread is at 3.8%, which is modest when you look at data since 1997. It’s also notably below the average 5.4% spread. So, if bond investors are our early warning system, they’re not sounding any alarms just yet.

2. Banks: Still Confident and Lending

Banks are in the game of loaning money to companies and expecting it back – with interest. Their survival hinges on ensuring their borrowers stay afloat. With business loan delinquency rates below 1% this quarter, it’s evident that banks aren’t concerned. And why should they be? That rate is even lower than the pre-pandemic 1.1% and significantly under the 2.7% average outside of recession zones.

3. Entrepreneurs: The Business Phoenixes

Amidst the bankruptcy chatter, here’s a silver lining: entrepreneurship is booming. More than 293,000 business applications were filed in the first half of this year. Even better, these businesses plan on having payrolls. This growth, up by 2% YoY and a whopping 21% compared to the first half of 2019, showcases the resilience and adaptability of the business spirit.

As Varghese aptly puts it, post-pandemic, entrepreneurship went on steroids. Despite some stern moves by the Fed in 2022, the entrepreneurial flame only seems to burn brighter.

In sum, while bankruptcies might make for some spicy headlines, the broader economic indicators and entrepreneurial spirit tell a story of adaptability, resilience, and promise. For the astute investor or business maven, this could very well be an opportune moment of evolution and growth in the business landscape.

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