MW The Fed may already be too late in hiking interest rates - which is bad news for these borrowers
By Joy Wiltermuth
Friday's strong jobs report could soon feel like a double-edged sword for borrowers struggling to keep up with inflation and their bills
Households are struggling to afford bills, gas and groceries. Higher interest rates would add to the burden.
May's surprisingly strong jobs report could soon feel like a double-edged sword for borrowers struggling to keep up with inflation and their bills.
The artificial-intelligence race has catapulted stocks to fresh highs this year and kept credit markets on fire - but bond investors are increasingly worrying about the people being left behind.
"The lower-income cohorts, I can see them struggling," said Tracy Chen, a portfolio manager at Brandywine Global who specializes in buying bonds backed by consumer and corporate debt.
Younger borrowers facing student-loan repayments and a brutal entry-level jobs market are struggling too, she noted.
Yet Chen said Friday that the Federal Reserve is already behind the curve on hiking interest rates. She thinks rate hikes are needed even if it means more pressure on households already squeezed by bills, gas prices and trips to the grocery store.
"The job market is stabilizing," Chen told MarketWatch. "We know that interest rates are higher, but financial conditions are still loose."
Stress among lower-income households often shows up in rising subprime auto-loan delinquencies, which this year rose above 10% as a share of outstanding loan balances, according to Moody's Analytics.
Stimulus and a strong jobs market kept delinquencies low during COVID.
Some improvements in delinquencies arrived this spring with the year's bigger tax refunds. But that one-time financial boost will fade, signaling more trouble could be brewing if inflation, already near 4%, keeps rising unchecked.
"The American consumer writ large is fragile, and under increasing financial pressure," said Mark Zandi, chief economist at Moody's Analytics. "There isn't a cliff event," he said, adding that it's a "corrosive" process that slowly wears down the ability of households to spend and keep up on their debts.
Read: Americans are using buy-now-pay-later for gas and groceries, showing just how expensive daily necessities are now
Fraud may have toppled subprime auto lender Tricolor last year, but other finance companies that sell bonds backed by their car loans also faltered. American Car Center and US Auto Sales have also gone bankrupt since 2022, when inflation and rates were both rising, according to a tally from Moody's Ratings. Higher rates can trigger default waves that might jeopardize more lenders.
Financial stocks have fallen this year, while the big three U.S. equity indexes SPX DJIA COMP have powered to fresh record highs. The State Street Financial Select Sector SPDR ETF XLF was down 4.8% in 2026 as of Friday. However, many nonbank lenders that focus on riskier borrowers have been financed by private credit, leveraged loans and the high-yield bond market.
"It's two different markets," said Henry Song, portfolio manager at Diamond Hill, of consumer credit. Like Chen at Brandywine, he has been getting pickier about which consumer lenders he's willing to finance.
Prime consumers are holding up well, Song said. But it's another story beyond the wealthy and the record share of households with a slice of the booming equity market.
Since 2022, the "big saving grace if you lost your job has been you could go across the street and find a new one," Song said. May's labor-market report showed the economy added more jobs than Wall Street anticipated.
Yet wages lately have struggled to keep up with rising inflation. This comes as car prices and monthly loan payments have skyrocketed. Estimates put the average subprime auto-loan payment at $448 a month and a 15.5% interest rate in 2019, when looking at loans in bond deals. Those payments increased by about $100 a month as of this year, and at rates closer to 18.25%.
Signs of a strengthening labor market should mean more available jobs, potentially keeping a lid on borrower defaults - although there's still plenty of uncertainty around the Iran war, oil and gas prices, and how high inflation might go from here. The AI boom might also displace workers or require the retraining of recent college graduates.
Daniel Liesener, a senior research analyst at Columbia Threadneedle, has been keeping a close eye on the uncomfortable unemployment rate among 20- to 25-year-olds. "If feels like these borrowers are getting hit by one thing after another," he said.
Meanwhile, the Treasury market sent an even stronger signaling on Friday that the Fed may need to hike rates. The 2-year Treasury yield BX:TMUBMUSD02Y surged 12 basis points on Friday to 4.16% after the jobs report. That's well above the U.S. central bank's 3.75% upper limit of its target policy range.
"We are looking for more durable lenders," said Song at Diamond Hill. After all, many businesses that began lending to consumers after the global financial crisis nearly two decades ago were set up for a low-rate environment. "Those days are gone," he noted.
-Joy Wiltermuth
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(END) Dow Jones Newswires
June 05, 2026 14:14 ET (18:14 GMT)
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