Last March, the rise in bond yields had shaken the American banking system, sending three regional banks into turmoil. A massive fire sale and a Fed program to lend money to keep them afloat followed, and the market mostly forgot about this hiccup.

Apart from the American banking system, which remains under pressure and is expected to face a reform of its prudential ratios early next year, the credit market is now under attack. Indeed, the increase in bond yields is starting to have consequences. A significant deterioration could have adverse effects on the economy. A recession will be much more brutal to avoid and significantly increase the risk of a substantial bankruptcy or failure of an institution capable of triggering a financial crisis.

The critical sign of the problem comes from small-cap stocks. They are much more exposed to rising interest rates than large companies, and the gap between their performance and that of the largest capitalizations has now widened dramatically. The Russell 2000 index of small businesses has just fallen below its pre-pandemic level, virtually giving up all its gains since the beginning of the decade. In contrast, the Russell 50 index of the top stocks is still up nearly 50% over the same period.

The stock prices of small-cap companies suggest that credit is becoming too tight, and the yields on their bonds are starting to do the same. Spreads are still not extreme, but they are rising. The risk premium demanded by investors may become challenging for small-sized businesses.

Many SMEs have another severe problem when repaying their debts: they need to make profits. The proportion of deficit “zombie” small businesses is much higher in the United States than Europe. This didn’t matter as long as interest rates were low. But today, we have entered a different environment.

The Federal Reserve’s survey of senior lending officers conducted quarterly since 1990 suggests that the proportion of banks tightening rather than loosening lending standards for commercial loans has reached levels only exceeded during the worst moments of the pandemic and the 2008 crisis. As risk premiums rise, access to liquidity for SMEs becomes more challenging.

Large companies are also starting to feel some pressure. Treasurers did a good job securing low rates when they were available in 2021, but they generally have yet to be able to secure funding for periods beyond this year. Repayment amounts will increase significantly next year and rise to levels that could prove problematic in 2025 and 2026. Monetary policy typically operates with an 18-month lag, so the impact of the credit tightening will likely be felt from the second half of 2025.