A Cacophony of Canaries

As the K-shaped economy continues to develop, with activity increasingly dependent upon upper-income households, we remain cautious on structured credit exposure to lower-credit consumers.¹

Auto loan and lease delinquencies remain elevated relative to the past 20 years, with prime auto delinquencies at the 84^th percentile and subprime at the 99^th percentile. That said, these levels have persisted for several years, and more recent securitizations, including some deep subprime vintages, have generally exhibited stable to improving performance. Importantly, prior deals have largely maintained structural integrity, with limited bond losses or downgrades to date.

Delinquency trends are likely to remain pressured into early 2026. Financial conditions remain tight, with policy rates still near 15-year highs.²

While above-average tax returns stemming from the 2025 tax-and-spending bill could help stressed consumers catch up on loan payments, consumer confidence is the lowest it’s been in 10 years amid persistently above-target inflation and signs of softening employment. And that was before recent, large high-profile layoff announcements from Amazon (16,000 jobs) and UPS (30,000 jobs).³

As overall credit-market returns ratchet down along with declining base rates, spreads can become the dominant component of yield, determining and driving the stability of returns for investors. With tight spreads, all-in yield compression and heightened risks—idiosyncratic, macroeconomic and geopolitical—caution across asset classes remains our new conviction.