MW 'Credit termites' are lurking in the bond market and eating away at your portfolio
By Satyajit Das
Jamie Dimon was wrong about 'cockroaches.' Opaque AI loans and high leverage are hollowing out the economy - again.
Layers of unstable debt are weakening credit markets.
The financial system looks vulnerable to a toxic mix of higher interest rates and a slowing economy.
JP Morgan Chase $(JPM)$ CEO Jamie Dimon set off alarms last fall when he warned of lurking "cockroaches" in the credit market.
Dimon's analogy is inaccurate - cockroaches are highly resilient insects that have survived for hundreds of millions of years. A more accurate metaphor would be credit termites - insects that infest and destroy structural timbers. They are hollowing out the financial system, unnoticed.
Rising prices are now working their way through supply chains. That means interest rates - especially for longer-dated maturities - are unlikely to fall and will probably move higher. Even if there is a comprehensive resolution to the Iran war, it will take considerable time for energy and chemical supplies to return to normal.
The ability of riskier borrowers to bear higher rates and an economic slowdown is questionable. Higher leverage, covenant-lite structures and PIK (payment in kind) provisions, which allow borrowers to pay interest with additional debt and not cash, raise the likelihood of distress. Loans to technology companies alone, specifically software-as-a-service (SaaS) and software companies, exceeded $500 billion at end of 2025, reflecting around 19% of total direct loans.
Public finances, meanwhile, are under increasing strain from the costs of the Iran conflict and programs designed to insulate households and businesses from higher energy costs. In the longer term, rising defense spending, the demands of aging populations and recurrent economic shocks will further affect national budgets.
In the U.S., total debt held by the public is expected to reach 120% of GDP by 2036, according to the Congressional Budget Office. U.S. government bond rates are likely to increase in response, with the rise spilling over to other borrowing costs.
The U.S. government, under its ATI (active Treasury issuance) policy, has increased reliance on short-term Treasury bills for its borrowing, in order to lower interest expense and limit potential rises in long-term bond rates. This means the U.S. government needs to refinance up to $9.6 trillion of its debt (roughly one-third) in 2026, making it vulnerable to market disruptions.
European states also face problems. Like the PIGS (Portugal, Ireland, Greece, Spain) in the 2011 European debt crisis, the focus is now on the FIBs (France, Italy, Britain) - all heavily indebted countries with stagnant economies and structural problems. Their borrowing costs are drifting up. Political instability in these countries are an added factor.
In addition to bond investors, banks and central banks are at risk. The 2023 collapse of Silicon Valley Bank was the result of losses on its holdings of long-dated securities, which had to be liquidated when the bank experienced large withdrawals by depositors.
At the end of 2025, total unrealized losses on held-to-maturity and available-for-sale securities portfolios were $306 billion. Meanwhile, central banks globally have substantial holdings of government bonds and mortgage-backed securities, much of it acquired as part of quantitative easing programs. As of early 2026, the U.S. Federal Reserve showed unrealized losses on its bond holdings of around $850 billion. These losses would have risen as bonds rates have gone up.
Moreover, there's growing unease about private debt being issued to finance AI data centers, which now constitutes up to 14% of the investment-grade bond market. While hyperscalers including Amazon.com (AMZN), Alphabet $(GOOG)$ $(GOOGL)$, Meta Platforms (META) and Microsoft $(MSFT)$ are strong credits, the increase in borrowing is significant and the investment returns are uncertain. As Oracle $(ORCL)$ illustrates, a re-rating of these obligations is possible.
There's a worrying lack of transparency with these loans. When First Brands filed for bankruptcy, the level of borrowings, what was pledged to whom, and the impact of related party transactions were unclear. In February 2026, U.K. mortgage lender Market Financial Solutions collapsed. In May, HSBC belatedly announced a $400 million "fraud-related" charge citing "indirect" exposure. The bank had lent to a private-credit-fund-linked special purpose vehicle which had on-lent to the defaulted borrower. Creditors did not seem to know where the true exposure lay.
Banks and funds have overlapping exposure to borrowers. There are unstable layers of debt at the firm, fund and investor level. A single bankruptcy could work through multiple portfolios simultaneously.
Economist Ludwig von Mises offered a stark prognosis of overleveraged systems: "There is no means of avoiding the final collapse of a boom brought about by credit expansion... The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Excessive borrowings have long been central to financial crises. There is no reason to believe that this time will be different.
Satyajit Das is a former banker and author of Traders, Guns & Money, Extreme Money, and A Banquet of Consequences - Reloaded ( 2021).
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-Satyajit Das
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May 20, 2026 15:12 ET (19:12 GMT)
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