Finance

The consumer price index rose 3.7% in the 12 months through September, unchanged from August, the U.S. Bureau of Labor Statistics said Thursday.
Pandemic-era inflation peaked at 9.1% in June 2022, the highest rate since November 1981.
The Federal Reserve aims for a 2% annual inflation rate over the long term. Fed officials don’t expect that to happen until 2026.

Mario Tama | Getty Images

Inflation was unchanged in September, but price pressures seem poised to continue their broad and gradual easing in coming months, according to economists.
In September, the consumer price index increased 3.7% from 12 months earlier, the same rate as in August, the U.S. Bureau of Labor Statistics said Thursday.

The latest reading is a significant improvement on the Covid pandemic-era peak of 9.1% in June 2022 — the highest rate since November 1981.
“The speed of the decline is always going to be uncertain,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics. “But anywhere you look, [data] suggests inflation should be falling rather than rising.”

The CPI is a key barometer of inflation, measuring how quickly the prices of anything from fruits and vegetables to haircuts and concert tickets are changing across the U.S. economy.
Despite recent improvements, economists say it will take a while for inflation to return to normal, stable levels.
The Federal Reserve aims for a 2% annual inflation rate over the long term. Fed officials don’t expect that to happen until 2026.

“Ultimately, inflation is still the most menacing issue in the economy right now,” said Sarah House, senior economist at Wells Fargo Economics. “We’re edging our way back [to target], but there’s still quite a bit of ground to cover,” she added.

Gas prices still something consumers ‘contend with’

Gas prices were up 2.1% in September, on a monthly basis — a “major contributor” to inflation last month, the BLS said.
However, that’s a big improvement from August, when prices at the pump jumped 10.6% during the month largely due to dynamics in the market for crude oil, which is refined into gasoline.
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“It’s still something consumers have to contend with, but not as big an increase as what households were having to deal with in August,” House said.
Prices have fallen in October, too. The average price per gallon was $3.68 as of Oct. 9, down 15 cents a gallon since Sept. 25, according to the Energy Information Administration.

Housing inflation continues to move downward

When assessing underlying inflation trends, economists generally like to look at a measure that strips out energy and food prices, which tend to be volatile from month to month.
This pared-down measure — known as the “core” CPI — fell to an annual rate of 4.1% in September from 4.3% in August.
Shelter — the average household’s biggest expense — has accounted for more than 70% of that total increase in the core CPI over the past year. Housing inflation increased in September, to its highest monthly rate since May.

However, the housing-price trend “remains firmly downward,” and should continue to slow through roughly summer next year, House said.
“That will be an important source of the overall rate of disinflation as we move through 2024,” she said.
Other categories with “notable” increases in the past year include motor vehicle insurance (up 18.9%), recreation (up 3.9%), personal care (up 6.1%) and new vehicles (up 2.5%), the BLS said.

Why inflation is returning to normal

At a high level, inflationary pressures — which have been felt globally — are due to an imbalance between supply and demand.
Energy prices spiked in early 2022 after Russia invaded Ukraine. Supply chains were snarled when the U.S. economy restarted during the Covid-19 pandemic, driving up prices for goods. Consumers, flush with cash from government stimulus and staying home for a year, spent liberally. Wages grew at their fastest pace in decades, pushing up business’ costs.
Now, those pressures have largely eased, economists said.

Plus, the Federal Reserve has raised interest rates to their highest level since the early 2000s to cool the economy. This tool aims to make it more expensive for consumers and businesses to borrow, and therefore rein in inflation.
Average wage growth also declined to 4.4% in September, from a peak 9.3% in January 2022, according to Indeed data.
“Most of the evidence suggests the economy is still strong, but maybe cooling a bit,” Hunter said. “Labor market conditions are continuing to gradually cool as well.”
That said, there are a few potential sources of upward pressure on inflation, economists said. For example, the Israel-Hamas war has the potential to nudge up global energy prices. United Auto Workers strikes could elevate prices for cars if inventory declines. More

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CNBC’s Joumanna Bercetche is moderating a panel at the annual meetings of the International Monetary Fund and World Bank in Marrakech, Morocco.

Titled, “Reform Priorities for Tackling Debt,” the seminar will include Kristalina Georgieva, the managing director of the IMF, Ajay Banga, the president of the World Bank Group, Mohammad Al-Jadaan, the minister of finance for Saudi Arabia, Situmbeko Musokotwane, minister of finance for Zambia, and Anna Gelpern, professor of law and international finance at Georgetown Law
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Since Nov. 2022, global business leaders, workers and academics alike have been gripped by fears that the emergence of generative AI will disrupt vast numbers of professional jobs.
But the inputs that AI models receive, and the outputs they create, often need to be guided and reviewed by humans — and this is creating new paid careers and side hustles.
Prolific, a company that helps connect AI developers with research participants, has had direct involvement in providing people with compensation for reviewing AI-generated material.

The logo of generative AI chatbot ChatGPT, which is owned by Microsoft-backed company OpenAI.
CFOTO | Future Publishing via Getty Images

Artificial intelligence might be driving concerns over people’s job security — but a new wave of jobs are being created that focus solely on reviewing the inputs and outputs of next-generation AI models.
Since Nov. 2022, global business leaders, workers and academics alike have been gripped by fears that the emergence of generative AI will disrupt vast numbers of professional jobs.

Generative AI, which enables AI algorithms to generate humanlike, realistic text and images in response to textual prompts, is trained on vast quantities of data.
It can produce sophisticated prose and even company presentations close to the quality of academically trained individuals.
That has, understandably, generated fears that jobs may be displaced by AI.
Morgan Stanley estimates that as many as 300 million jobs could be taken over by AI, including office and administrative support jobs, legal work, and architecture and engineering, life, physical and social sciences, and financial and business operations. 
But the inputs that AI models receive, and the outputs they create, often need to be guided and reviewed by humans — and this is creating some new paid careers and side hustles.

Getting paid to review AI

Prolific, a company that helps connect AI developers with research participants, has had direct involvement in providing people with compensation for reviewing AI-generated material.

The company pays its candidates sums of money to assess the quality of AI-generated outputs. Prolific recommends developers pay participants at least $12 an hour, while minimum pay is set at $8 an hour.
The human reviewers are guided by Prolific’s customers, which include Meta, Google, the University of Oxford and University College London. They help reviewers through the process, learning about the potentially inaccurate or otherwise harmful material they may come across.
They must provide consent to engage in the research.
One research participant CNBC spoke to said he has used Prolific on a number of occasions to give his verdict on the quality of AI models.
The research participant, who preferred to remain anonymous due to privacy concerns, said that he often had to step in to provide feedback on where the AI model went wrong and needed correcting or amending to ensure it didn’t produce unsavory responses.
He came across a number of instances where certain AI models were producing things that were problematic — on one occasion, the research participant would even be confronted with an AI model trying to convince him to buy drugs.
He was shocked when the AI approached him with this comment — though the purpose of the study was to test the boundaries of this particular AI and provide it with feedback to ensure that it doesn’t cause harm in future.

The new ‘AI workers’

Phelim Bradley, CEO of Prolific, said that there are plenty of new kinds of “AI workers” who are playing a key role in informing the data that goes into AI models like ChatGPT — and what comes out.

As governments assess how to regulate AI, Bradley said that it’s “important that enough focus is given to topics including the fair and ethical treatment of AI workers such as data annotators, the sourcing and transparency of data used to build AI models, as well as the dangers of bias creeping into these systems due to the way in which they are being trained.”
“If we can get the approach right in these areas, it will go a long way to ensuring the best and most ethical foundations for the AI-enabled applications of the future.”
In July, Prolific raised $32 million in funding from investors including Partech and Oxford Science Enterprises.
The likes of Google, Microsoft and Meta have been battling to dominate in generative AI, an emerging field of AI that has involved commercial interest primarily thanks to its frequently floated productivity gains.
However, this has opened a can of worms for regulators and AI ethicists, who are concerned there is a lack of transparency surrounding how these models reach decisions on the content they produce, and that more needs to be done to ensure that AI is serving human interests — not the other way around.
Hume, a company that uses AI to read human emotions from verbal, facial and vocal expressions, uses Prolific to test the quality of its AI models. The company recruits people via Prolific to participate in surveys to tell it whether an AI-generated response was a good response or a bad response.
“Increasingly, the emphasis of researchers in these large companies and labs is shifting towards alignment with human preferences and safety,” Alan Cowen, Hume’s co-founder and CEO, told CNBC.
“There’s more of an emphasize on being able to monitor things in these applications. I think we’re just seeing the very beginning of this technology being released,” he added. 
“It makes sense to expect that some of the things that have long been pursued in AI — having personalised tutors and digital assistants; models that can read legal documents and revise them these, are actually coming to fruition.”

Another role placing humans at the core of AI development is prompt engineers. These are workers who figure out what text-based prompts work best to insert into the generative AI model to achieve the most optimal responses.
According to LinkedIn data released last week, there’s been a rush specifically toward jobs mentioning AI.
Job postings on LinkedIn that mention either AI or generative AI more than doubled globally between July 2021 and July 2023, according to the jobs and networking platform.

Reinforcement learning

Meanwhile, companies are also using AI to automate reviews of regulatory documentation and legal paperwork — but with human oversight.
Firms often have to scan through huge amounts of paperwork to vet potential partners and assess whether or not they can expand into certain territories.
Going through all of this paperwork can be a tedious process which workers don’t necessarily want to take on — so the ability to pass it on to an AI model becomes attractive. But, according to researchers, it still requires a human touch.
Mesh AI, a digital transformation-focused consulting firm, says that human feedback can help AI models learn mistakes they make through trial and error.
“With this approach organizations can automate analysis and tracking of their regulatory commitments,” Michael Chalmers, CEO at Mesh AI, told CNBC via email.
Small and medium-sized enterprises “can shift their focus from mundane document analysis to approving the outputs generated from said AI models and further improving them by applying reinforcement learning from human feedback.”
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U.K. regulator the Financial Conduct Authority announced on Thursday that it had decided to fine Staley £1.8 million ($2.21 million) and ban him from holding a senior management or significant influence function in the sector.
Staley stepped down as CEO of the British lender in November 2021 following the findings of an initial FCA probe into his characterization of his ties with the disgraced former financier.

Jes Staley, former CEO of Barclays, arrives at the offices of Boies Schiller Flexner LLP in New York on June 11, 2023.
Bloomberg | Bloomberg | Getty Images

LONDON — Former Barclays CEO Jes Staley on Thursday was fined and banned from holding any position of influence in the U.K. financial services industry for misleading the regulator over his relationship with sex offender Jeffrey Epstein.
U.K. regulator the Financial Conduct Authority announced on Thursday that it had decided to fine Staley £1.8 million ($2.21 million) and ban him from holding a senior management or significant influence function in the sector.

The FCA found that Staley “recklessly approved” a letter sent by Barclays to the regulator that contained two misleading statements about the nature of his relationship with Epstein and the point of their last contact.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, said in a statement Thursday that a CEO “needs to exercise sound judgment and set an example to staff at their firm.”
“Mr Staley failed to do this. We consider that he misled both the FCA and the Barclays Board about the nature of his relationship with Mr Epstein,” Chambers said.
“Mr Staley is an experienced industry professional and held a prominent position within financial services. It is right to prevent him from holding a senior position in the financial services industry if we cannot rely on him to act with integrity by disclosing uncomfortable truths about his close personal relationship with Mr Epstein.”
Staley stepped down as CEO of the British lender in November 2021 following the findings of an initial FCA probe into his characterization of his ties with the disgraced former financier, who died by suicide in Manhattan’s Metropolitan Correctional Center after being charged with child sex trafficking.

The FCA asked Barclays in August 2019 to explain what it had done to satisfy itself that there was no impropriety in the relationship between the two men, and Staley approved a letter suggesting that they did not have a close relationship.
Emails subsequently emerged in which Staley described Epstein as one of his “deepest” and “most cherished” friends, the FCA confirmed. Barclays’ letter also claimed Staley had ceased contact with Epstein long before he joined the bank in December 2015. He was later discovered to have spoken to Epstein on Oct. 28, 2015. More

Politicos, rejoice. When it comes to elections, next year is a big one. In 2024 the Republicans and Democrats will battle it out in America, of course—but there will also be votes of one sort or another in Algeria, India, Mexico, Pakistan, Russia, South Africa, Taiwan, probably Britain, and many more countries besides. All told, as many as 3bn people, in countries producing around a third of global gdp, will have the chance to put an “X” in a box. And in many of these locations, populist politicians are polling well. What would their success mean for the global economy?Economists have long suspected that populists do grave damage. Names such as Salvador Allende in Chile and Silvio Berlusconi in Italy are hardly synonymous with economic competence. By contrast, what you might call “sensible” leaders, including, say, Konrad Adenauer in Germany and Bill Clinton in America, are more often associated with strong growth. New research, forthcoming in the American Economic Review, perhaps the discipline’s most prestigious journal, puts hard numbers on the hunch.The authors, Manuel Funke and Christoph Trebesch of the Kiel Institute for the World Economy and Moritz Schularick of the University of Bonn, look at over a century of data. They classify administrations as “populist” or “non-populist” (or what you might call sensible), based on whether the administration’s ideology has an “us-versus-them” flavour. This is inevitably an arbitrary exercise. People will disagree over whether this or that administration should really be classified as populist. Yet their methodology is transparent and backed up by other academic research.Mr Funke and colleagues then look at how various outcomes, including gdp growth and inflation, differ between the two types of regime. The trick is to identify the counterfactual—how a country under a populist government would have done under a more sensible regime. To do this, the authors create “doppelganger” administrations, using an algorithm to build an economy that tracks that country’s performance pre-populist governance. During Berlusconi’s tenure as prime minister for much of 2001 to 2011, for instance, the authors compare Italy’s economy to a phantom Italy mostly comprised of Cyprus, Luxembourg and Peru. The three countries share characteristics with the world’s eighth-largest economy, including a heavy reliance on international trade.Having identified 51 populist presidents and prime ministers from 1900 to 2020, the authors find striking results. For two to three years there is little difference in the path of real gdp between countries under populist and sensible leadership. For a time, it may seem as though it is possible to demonise your opponents and run roughshod over property rights without all that much consequence. Yet a gap eventually appears, perhaps as foreign investors start to look elsewhere. Fifteen years after a populist government has entered office, the authors find that gdp per person is a painful 10% lower than in the sensible counterfactual. Ratios of public debt to gdp are also higher, as is inflation. Populism, the authors firmly establish, is bad for the pocketbook.The results are comforting for those who believe in the importance of honourable politicians doing the right thing. But what if sensibles are not what they used to be? Although Mr Funke and his colleagues cannot judge the record of the most recent populist wave, some examples suggest the gap between sensibles and populists may not be as large as it was. Under President Donald Trump, the American economy largely beat expectations. Recep Tayyip Erdogan has stifled free speech in Turkey, but relative to comparable countries, real economic growth has been pretty strong. Under Narendra Modi, India’s economy is roaring ahead: this year its gdp is likely to grow by 6% or so, compared with global growth of around 3%. Under populist leadership, Hungary and Poland are not obviously doing worse than their peers.Given Mr Trump’s tariffs and Mr Erdogan’s unusual monetary policy, it is unlikely that these countries’ relative success is down to smart policymaking. Instead, their relatively strong performance may reflect the fact that countries with sensible leadership are finding growth harder to attain. In the 1960s Western countries, rebuilding from the second world war and with young populations, could hope to hit annual growth rates of 5% or more. The opportunity cost of poor economic management was therefore high. Today, in part because of older populations, potential growth is lower. As a result, the gap in gdp growth between a competent and an incompetent administration may be smaller.Yet sensible politicians are also dropping the ball. In the past they promised voters higher incomes, said how they would deliver them and then implemented the necessary policies. These days, politicians across the oecd club of mostly rich countries pledge half as many pro-growth policies as they did in the 1990s, according to your columnist’s analysis of data from the Manifesto Project, a research project. They also implement fewer: by the 2010s product- and labour-market reforms had practically ground to a halt. Meanwhile, politicians have put enormous blocks in the way of housing construction, helping raise costs and constraining productivity growth. Many focus their attention on pleasing elderly voters through generous pensions and funding for health care.Shades of greyPopulists are themselves unlikely to solve any of these problems. But what are the sensibles offering as an alternative? Technocratic, moderate governments need to regain their growth advantage. After all, a belief that maverick politicians will damage the economy is one of the main things standing in the way of more people voting for them. If scepticism about the economic competence of sensible governments deepens, it may seem like less of a risk to vote for a headbanger. Although, over the long sweep of history, economists are right to mock the economic policies of populists, today the sensibles need to get their house in order, too. ■Read more from Free exchange, our column on economics:To understand America’s job market, look beyond unemployed workers (Oct 5th)Why the state should not promote marriage (Sep 28th)Renewable energy has hidden costs (Sep 21st)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

It was james carville, an American political strategist, who said, in an oft-repeated turn of phrase, that if he was reincarnated he would like to return as the bond market, owing to its ability to intimidate everyone. Your columnist would be more specific: he would come back as the yield curve. If the bond market is a frightening force, the yield curve is the apex of the terror. Whichever way it shifts, it seems to cause disturbance.When the yield curve inverted last October, with yields on long-term bonds falling below those on short-term ones, analysts agonised about the signal being sent. After all, inverted curves are often followed by recessions. But now the curve seems to be disinverting rapidly. The widely watched 10-2 spread, which measures the difference between ten- and two-year bond yields, has narrowed markedly. In July two-year yields were as much as 1.1 percentage points above their ten-year equivalents, the biggest gap in 40 years. They have since drawn much closer together, with only 0.3 of a point between the two yields.Since the inversion of the yield curve was taken as such a terrible omen, an investor would be forgiven for thinking that its disinversion would be a positive sign. In fact, a “bear steepener”, a period in which long-term bonds sell off more sharply than short-term bonds (as opposed to a “bull steepener”, in which short-term bonds rally more sharply than long ones), is taken to be another portent of doom in market zoology.Driving the latest scare is the rising term premium, which is often described as the additional yield investors require to hold longer-dated securities, given the extra uncertainty over such extended periods. According to estimates by the New York branch of the Federal Reserve, the premium on ten-year bonds has risen by 1.2 percentage points from its lowest level this year, more than explaining the recent surge in long-term yields.In truth, though, the term premium is a nebulous thing, and must be treated with caution. It cannot be measured directly. Instead, as with a surprising number of important economic phenomena, analysts have to tease it out by measuring more concrete parts of the financial system, and seeing what is left over. Estimating the premium for a ten-year bond requires forecasting predicted short-term interest rates for the next decade, and looking at how different they are from the ten-year yield. What remains—however large or small—is the term premium.The difficulties do not stop there. John Cochrane of Stanford University’s Hoover Institution points out that, although risk premiums might be more easily estimated at relatively short maturities, the calculations require more and more assumptions about the future of short-term interest rates as analysts move along the curve. When estimates of the term premium are published, they are not typically accompanied by a margin of error. If they were, the margins would get progressively wider the longer into the future the forecast was conducted.There is also surprisingly little history from which to draw when making assessments of changes in the yield curve or term premium. In the past 40 years, there have been perhaps eight meaningful periods of bear steepening, and only in three of them was the yield curve already inverted. The three instances—in 1990, 2000 and 2008—were followed by recessions, but with widely varying lags.Movements in bond markets are therefore both easy and difficult to explain. They are easy to explain because any number of factors could be driving yields, including the Fed’s quantitative-tightening programme, concerns about the sustainability of American debt and worries of institutional decay. Yet attributing bond yields to one factor in particular is fraught with difficulty. And without more clarity on the causes of a move, inferring the future from the shape of the yield curve becomes more like reading tea leaves than a scientific endeavour.One thing is certain, however. Whatever their cause, and regardless of their composition, rising long-term bond yields are terrible news for American companies that wish to borrow at long time horizons, and borrowers who take out new mortgages that will be linked to 30-year interest rates. The effect on the most sensitive borrowers will become only more painful if yields with long maturities remain at such high levels. For anyone concerned about whether a shifting yield curve or a rising term premium signals a looming recession or a nightmare for markets, these simple realities are a better place to start.■Read more from Buttonwood, our columnist on financial markets: Why investors cannot escape China exposure (Oct 5th)Investors’ enthusiasm for Japanese stocks has gone overboard (Sep 28th)How to avoid a common investment mistake (Sep 21)Also: How the Buttonwood column got its name More

When treasury bonds (or t-bills) last yielded as much as they do today—5.5%—punters were relieved that the world had not been destroyed by the millennium bug, Destiny’s Child were atop the charts and the dotcom bubble was going strong. The recent surge in yields has been remarkable (see chart).image: The EconomistYet bank depositors are seeing just a fraction of these increases. The average American savings account yields just 0.45%. Investors, too, are missing out. For the first time in over two decades, at the end of last year the return offered by six-month Treasuries overtook the earnings yield of s&p 500 companies.So retail investors are looking elsewhere. Trading platforms have made short-term Treasury products a big part of their offering. Advertisements for Public, one such platform, ask podcast listeners if they are aware of the meagre savings rate on their deposit accounts. Despite only having been available on the platform since March, Treasuries are now its most purchased asset. One in ten new users buy them as their first trade.Demand for Treasuries reflects a broader move towards safe, high-yielding options. Money-market funds invest in low-risk, short-duration instruments, including Treasuries. More than $880bn has been added to such funds this year, bringing their total value to an all-time high of $5.7trn. As with retail short-dated Treasury accounts, money-market funds are attractive to savers because they are highly liquid, meaning that cash can be withdrawn quickly if required.The growing popularity of such alternatives is upsetting the logic of retail banking. Banks get away with providing interest rates well below the interest they receive from short-term government debt because—as Public’s advertisements identify—many depositors pay little attention. By sucking deposits from the banking system, money-market funds are thought to have contributed to financial instability in the spring.Retail-trading platforms’ expansion has made it easier than ever for depositors to transfer funds into short-dated government debt. That may further erode the discount on savings rates that depositors will accept from banks, and make Treasuries a bigger feature in retail-investment portfolios. Savers will, then, be singing along to one of Destiny’s Child’s better tunes: “Bills, Bills, Bills”.■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Big American companies are living in a debt dreamland. Although cheap borrowing has fuelled the growth of corporate profits for decades, the biggest firms have been largely insulated from the effects of the Federal Reserve’s recent bout of monetary tightening. That is because many of them borrowed plentifully at low, fixed interest rates during the covid-19 pandemic. The tab must be settled eventually by refinancing debt at a much higher rate of interest. For now, though, the so-called maturity wall of debt falling due looks scalable.image: The EconomistBut not all companies are escaping the impact of the Fed’s actions. Indeed, there is trillions of dollars of floating-rate debt, with interest payments that adjust along with the market, that has suddenly become much more expensive. This pile of debt consists of leveraged loans and borrowing from private debt markets. Companies seldom hedge interest-rate risks, meaning that they now find themselves paying through the nose—the yield-to-maturity of one index of leveraged loans has leapt to almost 10% (see chart 1). Meanwhile, since American economic growth remains resilient, the Fed’s policymakers warn that interest rates will have to stay higher for longer. This will push more borrowers to breaking-point. A market that has grown vast is now asking two miserable questions. How bad will things get? And who, exactly, will lose out?Since the global financial crisis of 2007-09, companies have borrowed fast and loose. UBS, a bank, estimates the value of outstanding American leveraged loans at around $1.4trn and the assets managed by private credit lenders at more than $1.5trn. The two types of debt are more alike than they are different. Both have grown to service the private-equity buy-out boom of the past decade. Traditional leveraged loans are arranged by banks before being sold (or “syndicated”) to dozens of investors, whereas private lending involves just a handful of funds, which usually hold smaller loans to maturity, creating a less liquid and more opaque market.Increasing numbers of borrowers are now hitting the rocks. Since 2010 the average annual default rate in the leveraged-loan market has been less than 2%. According to Fitch, defaults rose to 3% in the 12 months to July, up from 1% a year earlier. The ratings agency reckons that they could shoot up to 4.5% in 2024. Restructurings and bankruptcies on this scale amount to spring cleaning rather than the deep distress felt during the financial crisis, when loan defaults exceeded 10%. But if rates stay higher for longer, as central bankers predict, the tally of troubled firms will grow. Although all companies with unhedged floating-rate debt balances are vulnerable, those loaded with debt in private-equity buy-outs at high valuations during the recent deal boom are especially at risk.image: The EconomistSlowing profit growth means that borrowers are finding it harder to afford their floating-rate debt. JPMorgan Chase, a bank, analysed 285 leveraged-loan borrowers at the end of June, before the Fed’s most recent rate rise. Firms where borrowing consisted only of leveraged loans saw their annual interest expense soar by 51% year-on-year. Their fortunes are diverging sharply from those that instead tapped high-yield bond markets for fixed-rate funds. According to the study, the interest expenses of such businesses have increased by less than 3%. Coverage ratios, which compare a firm’s profits with its interest costs, have begun an ominous decline (see chart 2).In the private debt market, where default rates tend to be higher, borrowers are confronting similar woes. According to Bank of America, interest costs now consume half of profits at firms where loans are held by the largest business-development companies, a type of investment vehicle. A big rise in distress would not only make it harder to find institutions willing to plough money into private debt funds, with investors normally attracted by the promise of smooth returns, but also spill over to the leveraged-loan market.Now that a reckoning looks imminent, attention is turning to which investors will be left holding the bag. Lenders today expect to recover less of their investment after a firm defaults than in earlier eras—and this year so-called recovery rates across junk-rated debt have been well below their long-run averages. According to Lotfi Karoui of Goldman Sachs, another bank, the rise of borrowers that rely solely on loans, rather than borrowing from bond markets too, could depress recoveries still further. This trend has concentrated the pain caused by rising interest rates. It is also likely to leave less value for leveraged-loan investors when they find themselves round a restructuring table or in a bankruptcy court, since there will be more claims secured against a firm’s assets.Other long-term trends could exacerbate the leveraged-loan market’s problems. Maintenance covenants, commitments that lenders can use as a “stick” to force a restructuring, have all but disappeared as the market has matured. In 2021 nearly 90% of new loans were “covenant-lite”. This could mean that companies take longer to reach default, and are in worse health when they get there. Excessive “add backs”, flattering adjustments to a company’s profitability measures, might also mean that leveraged borrowers are in worse shape than the market believes.The performance of private markets is also being closely scrutinised. Advocates for private debt have long argued that they are better suited to periods of higher defaults, since the co-ordination costs between a small group of lenders are lower, making the correction of vexed balance-sheets easier. If private markets do indeed fare better than leveraged loans during the forthcoming turmoil, it would bolster their attempts to attract finance in future.Problems in floating-rate debt markets are unlikely to cause a financial crisis, but the murkiness and growing size of private markets in particular mean that regulators have decided to take a closer look. In August America’s Securities and Exchange Commission announced rules to increase transparency, including demanding quarterly financial statements. The following month, the International Organisation of Securities Commissions, a global regulatory body, warned about the risks of leverage and the opacity of private debt markets. Few investors, however, think they need help predicting a coming crunch. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More