The last fifteen years were undeniably marked by a unique period in financial market history, distinguished by a continuous decline in interest rates around the world.

This extended phase of low to even negative interest rates, in certain regions, began after the 2008 financial crisis, in turn linked to the explosion of subprime loans(2). In response to this shock, itself caused by interest rate products, the Central Banks decided to adopt ultra-accommodative monetary policies with the aim of stimulating an economic recovery. And, in addition to “traditional” key rate cuts, they set up quantitative easing policies(3) that saw massive quantities of cash injected into the financial system. This mainly consisted in buying up government bonds, public entity bonds and mortgage loans, thus setting the stage for favourable credit conditions spanning more than a decade.

Against this backdrop, investors and companies alike largely benefited from record-low financing costs. Meanwhile, the bond markets saw a sharp increase in supply, both from governments seeking to refinance their debt at a lower cost and from companies seizing the opportunity to raise cheap capital to fund their growth or extend the maturity of their debt. As a result, the level of negative-rate debt hit record highs during this period(4).

Investors wanting to play it safe massively bought up government and corporate bonds offering negative yields, which helped keep financing costs at exceptionally low levels.

At the same time, low rates made the search for yield easier, encouraging investors to turn to higher-risk assets, such as high yield bonds(5), equities or unlisted assets. Consequently, private equity funds (among others) benefited from a sharp rise in the number of investors as well as a significantly lower cost of capital, which shored up valuations.

Meanwhile, the real estate sector enjoyed the same momentum: with historically low borrowing rates, demand for residential and commercial real estate took off, attracting institutional and individual investors alike. This rise in demand caused real estate prices to climb, especially in large cities, where prices sometimes hit record levels(6). Low financing costs thus promoted growth in real estate prices, creating imbalances between the valuations and actual returns on assets, and increasing the risk of overheating the economy in some markets.

In 2020, the Covid-19 pandemic sent unprecedented shock waves across the global economy, forcing governments to launch massive economic stimulus plans and Central Banks to reactivate their QE programmes in an effort to prevent widespread economic collapse. However, this policy aimed at aiding the economic recovery gradually began to show its limits. Inflation, long contained below Central Bank targets, started to significantly gather pace in 2021. Rising commodity prices, disruptions in the supply chains of a heavily globalised economy, and increased demand which had been stifled during the different lockdown periods, all combined to drive inflation to never-before-seen levels on a global scale. After being held at floor levels for so many years, interest rates underwent a sudden turnaround.

In 2022, the Central Banks adopted much more restrictive monetary policies to address this rampant inflation. The Fed and the ECB thus began rapidly raising their key rates to combat inflation, marking the end of the low-rate era. This about-face deeply upset the financial markets, sending stock and bond prices tumbling. For many investors and companies, the rapid rise in interest rates put paid to a decade of exceptional conditions and shed light on new vulnerabilities, particularly in highly indebted sectors.

Paradoxically, despite these upheavals, credit spreads(7) stayed contained in this environment and still remain at historically low levels to this day. This resilience may prove surprising, given the contrast with the challenges met by a number of weakened sectors. There are multiple reasons for this scenario.

First, the huge cash injections implemented after the Covid-19 pandemic kept surplus capital in the financial system, facilitating access to credit for many companies. Second, economic stimulus plans like the Inflation Reduction Act(8) in the United States had a major impact on growth, helping to keep economic activity going strong in this rising interest rate environment.

The resilience of credit spreads is not fully representative of how the economy as a whole reacted. Some sectors, especially those highly dependent on financing, were extensively affected by rapidly rising interest rates. For example, the real estate sector both in Europe and China was among the hardest-hit sectors. In Europe, groups such as Adler and Signa were destabilised, while in China the failure of Evergrande uncovered the risks associated with excessive debt. One thing these companies shared in common was a weak financial structure, making it difficult to impossible to refinance their debt as interest rates rose.