Double tightening in the United States: corporate debt tightening and CRE tightening

Introduction

In 2025, US financial markets are poised for a fragile equilibrium. A recent Moody's report reveals a dual squeeze on corporate debt distress and the commercial real estate (CRE) market. Corporate debt default risk has reached an 11-month high, and nonperforming loan rates for commercial real estate have hit a record high. Meanwhile, the Federal Reserve's policy signals signal concerns about deteriorating economic fundamentals. Under the dual pressures of high interest rates and a slowing economy, companies backed by private equity, in particular, are desperately trying to avoid bankruptcy through measures like distressed debt swaps to delay price discovery. Meanwhile, banks are retreating from CRE lending, adopting a "extend and pretend" strategy to maintain asset book values and conceal potential losses. Federal Reserve Governor Christopher Waller has proposed a rate cut in July 2025 to address labor market weakness, but this move may not be sufficient to address structural issues.

Combined with the latest data from 2025, this article analyzes the current status, causes, and potential consequences of U.S. corporate debt tightening and commercial real estate tightening, and assesses their systemic risks to the financial system.

The Current Status of U.S. Corporate Debt Tightening

According to a Moody's report in July 2025, the number of U.S. companies entering the highest level of financial distress (lowest credit rating) reached an 11-month high, with the industrial and consumer goods sectors being particularly serious, with 58 and 49 bankruptcy filings respectively, a 15-year high. Contributing factors include high borrowing costs (10-year Treasury yields near 4.5% in May 2025), global trade uncertainty (such as tariff barriers), and slowing economic growth (GDP growth forecasts have been lowered to 1.4% in 2025). Private equity-backed companies are particularly vulnerable, having borrowed heavily in the low-interest environment following the 2008 financial crisis, accumulating over $1.2 trillion in debt (according to PitchBook data) and exacerbating leverage through share buybacks or dividend refinancing. To avoid the price discovery that comes with bankruptcy, many companies are opting for distressed debt exchanges—out-of-court restructurings that extend debt maturities or adjust terms. Moody's notes that this strategy allows companies to temporarily maintain book value but delays the exposure to the true market value of their assets. According to S&P Global data, the high-yield bond default rate rose to 5.8% in the first half of 2025, the highest since 2020, and is expected to climb further to 6.5% by the end of the year. Furthermore, the widening federal deficit (Moody's predicts it will reach 9% of GDP by 2035) has pushed up Treasury yields, further squeezing corporate financing opportunities, especially for companies with lower credit ratings, whose interest coverage ratios have fallen below pre-pandemic levels. The tightening of US corporate debt reflects structural problems fostered by prolonged low interest rate policies. Private equity has masked corporate operational inefficiencies through financial engineering (such as stock buybacks), but high interest rates and a slowing economy have exposed these vulnerabilities. Distressed debt swaps can provide temporary relief, but they cannot address the underlying overleverage. If the economy deteriorates further or market confidence is shaken, forced price discovery could trigger a chain reaction, leading to a revaluation of corporate assets and investor panic. The commercial real estate market is experiencing a crisis driven by both structural and cyclical factors. The default rate for US commercial mortgage-backed securities (CMBS) on office properties reached a record high of 11.1% in 2025, exceeding the level seen after the 2008 financial crisis (according to Trepp data). This phenomenon is driven by decreased demand due to remote work, higher financing costs driven by high interest rates, and a continued decline in asset values. Data from the X platform indicates that 44% of the $2 trillion in commercial real estate debt maturing by 2025 is held by banks, with office property loans being particularly risky. Federal Reserve data shows that since the beginning of 2024, banks have significantly reduced their exposure to commercial real estate loans, particularly construction and land development loans. The FDIC's first-quarter 2025 report indicates that large banks' commercial real estate delinquency and nonperforming loan ratios reached 4.65%, the highest since 2014. Banks are prioritizing holding lower-risk assets such as U.S. Treasuries to protect their capital ratios. This retreat reflects concerns about economic uncertainty, particularly among regional banks, whose commercial real estate loans account for as much as 40%-50% of their assets (FDIC data). Similar to corporate debt, the commercial real estate market is widely adopting a "stretch and pretend" strategy. Banks modify loan terms (such as extending maturity dates or lowering interest rates) to avoid defaults and maintain the book value of assets. For example, a partially vacant office building may still be valued at its pre-pandemic fully leased value, deferring loss recognition. In 2023, the Federal Reserve, the FDIC, and the OCC jointly encouraged banks to avoid a wave of defaults through loan restructuring. This regulatory leniency further fueled the market's avoidance of price discovery. The commercial real estate crunch is an underappreciated crisis. High default rates and bank retreat suggest the market is nearing a tipping point, particularly in office properties. While regulators' permission for loan restructuring has averted a short-term crash, it has created a zombie market where asset values are out of touch with reality. The massive debt maturities by 2025 will force the market to confront price discovery, potentially leading to bank capital shortages and systemic risks for regional banks.

Federal Reserve Policy Response

Federal Reserve Board Governor Christopher Waller proposed an early interest rate cut in July 2025, citing a labor market that was "on the brink." The June 2025 non-farm payroll report showed 147,000 new jobs, but half came from the public sector, with the private sector performing weakly. The average weekly work hours for production and non-supervisory employees fell to the second lowest level since the pandemic, indicating a decline in consumer purchasing power. The Philadelphia Fed's 2025 report further noted that while bank loan delinquency rates were slightly lower than historical highs, debt write-offs hit a new high, reflecting potential pressures in the credit market. At its June meeting, the Federal Reserve maintained the federal funds rate at 4.25%–4.50%, but lowered its economic forecast: the 2025 GDP growth forecast fell from 1.7% to 1.4%, and the core PCE inflation forecast rose from 2.8% to 3.1%. Waller's rate cut proposal contrasts with the cautious stance of some officials, such as Mary Daly. However, the Fed's Beige Book, which omitted any mention of inflation and instead focused on layoffs, underscored concerns about an economic slowdown. The head of the Port of Los Angeles recently warned that businesses are borrowing heavily to stockpile inventory due to concerns about tariffs, potentially exacerbating financial pressures. Waller's rate cut proposal suggests the Fed is beginning to acknowledge economic weakness, but monetary policy will struggle to address structural issues with corporate debt and commercial real estate. While a rate cut could boost the stock market in the short term, it could also exacerbate inflation or further delay price discovery, prolonging market uncertainty. The Federal Reserve needs to strike a balance between stimulating the economy and avoiding asset bubbles, and its historically delayed response may compromise the effectiveness of its policies. Private equity plays a key role in the debt crunch of US companies. After 2008, low interest rates enabled private equity firms to borrow cheaply, accumulating over $1.2 trillion in debt (according to PitchBook data). These firms achieved short-term gains by acquiring companies and leveraging them (through stock buybacks or divestitures), but at the expense of long-term stability. By 2025, high interest rates and an economic slowdown exposed the vulnerabilities of these companies, increasing the risk of default. Systemic risk stems from the linkages between private equity and corporate debt, banks, and broader financial markets. The bankruptcy of a high-profile company could trigger a reassessment of risk across the entire industry, leading to a chain reaction of asset revaluations. Moody's notes that companies with the lowest credit ratings typically have only two options: bankruptcy or restructuring, but current market incentives create incentives to avoid both. Private equity's excessive leverage is a ticking time bomb, and its opacity exacerbates systemic risk. If a wave of defaults is triggered, it could ripple through banks, bond markets, and investor confidence. Regulators should mitigate risks by mandating disclosure of leverage levels and strengthening lending standards. Otherwise, a single event could trigger a systemic crisis similar to the one in 2008. The Lack of Price Discovery and Its Consequences The lack of price discovery is at the heart of the tightening of US corporate debt and commercial real estate. Banks, companies, and regulators are using a "stretch and pretend" strategy to maintain overvalued assets and avoid a 2008-style sell-off. The FDIC report shows that banks have $413.2 billion in unrealized bond losses, and capital shortfalls could be further exacerbated if commercial real estate loans were marked to market value. Corporate bankruptcies would also expose the true value of leveraged assets, potentially triggering a market correction. This strategy relies on the hope of a soft landing, but data from 2025—slowing GDP growth, a weak labor market, and inflationary pressures—suggest that this prospect is unlikely. Once price discovery occurs, whether through defaults, forced sales, or regulatory intervention, it could lead to bank capital pressures and market volatility. The lack of price discovery creates a false sense of stability, but this fragility cannot be sustained indefinitely. Regulatory leniency and market optimism have masked the true state of asset values, but maturing debt and an economic slowdown will force the market to confront reality. The arrival of price discovery could trigger systemic shocks, particularly for regional banks and private equity investors. Conclusion: The US financial market in 2025 faces the dual challenges of a corporate debt crunch and a commercial real estate crunch. Excessive leverage in private equity, a wave of commercial real estate defaults amidst high interest rates, and a weak labor market combine to create a fragile financial ecosystem. The Federal Reserve's potential rate cuts signal recognition of economic weaknesses, but they will not address underlying structural issues. Rising CMBS defaults, bank retreat, and increasing debt write-offs suggest the market is approaching a critical point. While the "extend and pretend" strategy delayed the crisis, it increased systemic risk. A single event—such as a major bankruptcy or a wave of commercial real estate defaults—could upset this balance, triggering asset revaluations and market turmoil. Policymakers need to address potential crises by increasing transparency, strengthening lending standards, and addressing fiscal imbalances. Otherwise, financial markets in 2025 could face a challenge even greater than that of 2008, testing the resilience of the U.S. economy.