by Gayl Mileszko
The Federal Reserve Bank of New York just issued its report on U.S. household debt and the numbers are most unsettling. In the first half of the year, aggregate debt balances stood at a record $17.1 trillion. Americans have added $2.9 trillion of debt since the start of the pandemic, with the biggest jumps being seen in the 40-49 age group. On June 30, total mortgage balances stood at $12.01 trillion. Outstanding student loans totaled $1.57 trillion. Credit card debt grew to an all-time high of $1.03 trillion, as 70 million more accounts have been opened since 2019, and now 84% of Americans have at least one card in their wallet. On top of all that debt, there is another $527 billion in home equity lines of credit, auto loans, retail cards, and other consumer loans.
National and Household Debt Rising Rapidly
At $17 trillion, U.S. household debt is now at the level where the U.S. national debt stood in mid-2014. Of course, the public debt has since ballooned by 83% to $32.6 trillion. Fitch Ratings recently cited this in its August 1 downgrade of our sovereign credit, pointing out that our debt to GDP ratio is 2.5 times higher than triple-A medians met by nine other sovereign credits. Household debt has increased by 44% in the past nine years. In recent history, this debt has only seen year-over-year declines during the post-recessionary period from 2009 to 2012. How much of this debt will be repaid? Well, no matter how much we openly fret about it as self-imposed limits expire, the U.S. cannot and will not default on its debts. But some of its citizens do. About 2.7% of household debt is in some stage of delinquency; the most serious involve credit cards and auto financing but these loan types may soon be exceeded by some of the student loans that have been in forbearance since March of 2020. More than 5% of card payments are 90 or more days delinquent. Approximately 4.6% of us are being tagged by third party collectors for an average of $1,555. More than 216,000 consumers have declared bankruptcy this year and there have been 74,000 new home foreclosures.
Tapping Retirement Accounts to Meet Short-Term Expenses
Rising debt balances may present challenges for many borrowers in the face of higher interest rates, inflation, and tighter lending standards. Many are extremely vulnerable to future economic downturns or shocks, and there are implications for everything from taxpayer supported schools to those planning senior living and care communities. The latest media meme is that as many as two-thirds of Americans cannot cover a $400 emergency expense. A good number rely on credit cards. Bankrate reports that 47 percent of credit card holders currently carry debt from month to month, and they are paying steep rates averaging 20.53% on these balances. The limits on these accounts have risen to $4.6 trillion. And yet the Fed sees little evidence of widespread distress at this time. Of course, as evidenced this Spring by the SVB, First Republic and Signature Bank failures, they may not be so good at spotting trouble. Unprecedented fiscal stimulus and peak pandemic policies may still be couching some problems; the resumption of student loan payments in October may exacerbate them. Bank of America reported that the number of clients who made a hardship withdrawal from their 401(k) accounts in the second quarter of 2023 increased by 36% from the first quarter as short-term expenses are being prioritized over long-term saving and investing.
After observing years of federal extraordinary aid and forbearance, while hearing White House proposals for debt forgiveness, some more carefree borrowers are of the opinion that some of their loans will eventually be written off. They fear no stigma or future penalty, given that there see numerous others in the same overleveraged boat. These include corporations, of which 2,973 filed for Chapter 11 bankruptcies during the last two quarters — many sold, reorganized, or recapitalized within a matter of days under pre-arranged terms and few, if any, headlines. And they look at the United States itself, which owes not thousands, or millions, or even billions, but tens of trillions and yet continues to operate and sell even more debt and print money, so far without major repercussion.
1.25 Billion U.S. Credit Cards, 572 Million U.S. Credit Card Accounts
Financial institutions have been happy to extend credit to Americans with upbeat consumer sentiment and spending patterns often undeterred by financial circumstances. Wallet Hub estimates that there are more than 1.25 billion credit cards and 572 million credit card accounts in circulation in the U.S., and that 73% of accounts carry a balance. Fortune magazine reported that U.S. adults carry an average of 4 credit cards. The primary networks are Visa, Mastercard, American Express and Discover, and their most recent quarterly revenue and earnings were impressive. Visa net revenues were up 12% from the comparable prior year period s transactions increased by 10%. Mastercard net revenue was up 14%, and net income rose 25%. American Express had a fifth straight quarter of record revenue and achieved record earnings per share. Discover reported that its $94 billion of loans were up 19% year-over-year. JP Morgan reported that its $294 billion in credit card sales volume in the second quarter increased 8.5% and revolving balances were up 16% from last year to $187 billion.
The Political Fray
The next fiscal year for the federal government begins in about 53 days but the Congress is in its district work period with no formal sessions until early September. After getting earfuls from their constituents, they will return to try and hash out the terms of 12 annual appropriations bills and a 5-year reauthorization of agricultural and food programs, among other legislation. This not an election year, but everything is highly political. The central bank endeavors to stay out of the fray, but its officials are political appointees, subject to Congressional oversight, and their rate-hiking has had a huge impact on Main Street, Wall Street, Capitol Hill and the White House. Fed officials will be closely monitoring the next two rounds of inflation reports to see if another increase is needed to bring the core number down into the range they view as appropriate without tipping the economy into a recession. There are only three more scheduled policy committee meetings this year, the next will take place September 19-20. Futures trading currently indicates that the market expects a pause until March 20, when the first of five 25 basis point cuts will be announced.
Municipal Trading Volume is Up
Although we are in the final weeks of summer vacation season, the financial markets are active. In fact, municipal trading is up 15% over July and recent weekly primary calendars have been among the largest of the year. Tax-exempt bondholders are seeing $62 billion of principal and interest hit their accounts this month, and they are looking to reinvest at higher yields. The Moody’s downgrades of ten smaller banks have driven some investors into the bond market where there is relative safety and attractive income. With the inverted yield curve, the highest yields are found in shorter maturities. At this writing, the 6-month bill at 5.50% offers the most. In the muni market, 7-day SIFMA municipal swap index is at 3.49%; the 1-year AAA yield stands at 3.30%, higher than the after-tax yield of the comparable Treasury. The impact of the Fitch Ratings downgrade of the sovereign credit of the United States and several agencies has been fairly muted but investors are gauging the trading value of other AAA rated sovereign and municipal credits relative to the U.S.
The markets were more roiled last week by the Treasury’s announcement of its increased borrowing needs than by the Fitch action. This week alone, ten auctions are scheduled, including $103 billion of 3-year, 10-year, and 30-year notes and bills. Most attention will be paid to the long bond sale that occurs a few hours after the July consumer price index data is released, but also the overall level of demand from investors versus dealers. Traders are also monitoring remarks made by Fed officials at five scheduled events, the aftermath of the yellow bankruptcy filed on Sunday, the direction of weekly fund flows, demand for the $33 billion of corporate bond sales planned, and quarterly earnings results for UPS, Disney, Tyson and Lilly.
Municipal Bond Slate
Last week, the municipal debt market saw two financings for BBB+ rated Presbyterian Senior Living. The Pennsylvania Economic Development Financing Authority sold $131.8 million of bonds structured with a 2049 maturity priced at 5.25% to yield 5.45%, and the National Finance Authority, a New Hampshire conduit issuer, had a $27.8 million sale featuring 2048 term bonds priced at 5.25% to yield 5.50%. This week’s slate includes a $118.1 million Washington State Housing Commission issue for A-minus rated Emerald Heights. The charter school sector was quiet last week but three financings are currently on tap: a $13.7 million non-rated sale for Virtus Academy in Florence, SC; a $12.1 million Ba2 rated transaction for Quality Education Academy in Winston-Salem; and the $45.3 million non-rated Wonderful Foundations portfolio of three charter schools in Arizona, Georgia and Indiana.
Talk to Your HJ Sims Representative
This week, public finance analysts are discussing three recent publications: a Chicago Fed working paper on the privatization trends in municipal debt, The 74’s feature on schools as the leading target for cyber gangs, and the report from the Center for Healthcare Quality and Payment Reform on the staggering number of rural hospitals at imminent risk of closure. Our banking, sales and trading teams are closely monitoring industry and market developments and are actively engaged with clients and colleagues across the country. We invite you to contact your HJ Sims representative this week to review income opportunities, market conditions, and sector trends.