Dual tightening appears in the U.S.: corporate debt tightening and CRE tightening.

Introduction

The U.S. financial market in 2025 is at a fragile tipping point, with Moody’s latest report revealing a dual tightening of corporate debt dilemmas and the commercial real estate (CRE) market. The risk of corporate debt defaults has reached an 11-month high, and the delinquency rate on commercial real estate loans has hit a record high, while signals from the Federal Reserve indicate concerns over deteriorating economic fundamentals. Particularly supported by private equity, companies are striving to avoid bankruptcy under the dual pressures of high interest rates and an economic slowdown, employing methods such as distressed debt exchanges to postpone price discovery. Meanwhile, banks are retreating from commercial real estate loans, adopting an "extend and pretend" strategy to maintain the book value of their assets and conceal potential losses. Federal Reserve Governor Christopher Waller has proposed an interest rate cut in July 2025 to address the weak labor market, but this move may not be sufficient to resolve structural issues.

This article analyzes the current situation, causes, and potential consequences of debt tightening among U.S. companies and the tightening of commercial real estate, based on the latest data from 2025, and assesses its systemic risk to the financial system.

The Current Situation of Debt Tightening in American Enterprises

According to Moody's report from July 2025, the number of U.S. companies entering the highest financial distress (the lowest credit ratings) has reached an 11-month high, with the industrial and consumer goods sectors particularly severe, recording 58 and 49 bankruptcy filings respectively, a 15-year high. Factors contributing to this phenomenon include high borrowing costs (the 10-year Treasury yield nearing 4.5% in May 2025), global trade uncertainties (such as tariff barriers), and a slowdown in economic growth (with the GDP growth forecast for 2025 revised down to 1.4%). Private equity-backed companies are especially vulnerable, having borrowed heavily in the low-interest-rate environment following the 2008 financial crisis, accumulating debt exceeding $1.2 trillion (according to PitchBook data), which has been exacerbated by stock buybacks or dividend refinancing that increased leverage.

To avoid the price discovery associated with bankruptcy, many companies choose to engage in distressed debt exchanges, which involve extending debt maturities or adjusting terms through out-of-court restructuring. Moody's notes that this strategy allows companies to temporarily maintain their book values but delays the exposure of the true market value of assets. According to S&P Global data, in the first half of 2025, the default rate on high-yield bonds has risen to 5.8%, the highest since 2020, and is expected to further climb to 6.5% by the end of the year. Additionally, the widening federal deficit (which Moody's predicts will reach 9% of GDP by 2035) has pushed up Treasury yields, further squeezing corporate financing space, particularly for companies with lower credit ratings, whose interest coverage ratios have fallen below pre-pandemic levels.

The tightening of corporate debt in the U.S. reflects the structural problems spawned by the long-term low interest rate policy. Private equity has masked operational inefficiencies through financial engineering (such as stock buybacks), but high interest rates and an economic slowdown have exposed these vulnerabilities. While the exchange of bad debt can temporarily alleviate pressure, it cannot change the nature of excessive leverage. Once the economy worsens further or market confidence wavers, forced price discovery may trigger a chain reaction, leading to a reassessment of corporate asset values and investor panic.

Tightening of the Commercial Real Estate Market

The commercial real estate market is undergoing a crisis driven by both structural and cyclical factors. By 2025, the default rate of commercial mortgage-backed securities (CMBS) for office properties in the United States is projected to reach 11.1%, a historic high that exceeds levels seen after the 2008 financial crisis (according to Trepp data). This phenomenon stems from a decrease in demand due to remote work, high financing costs driven by elevated interest rates, and a continued decline in asset values. Data from platform X indicates that 44% of the $2 trillion in commercial real estate debt maturing by 2025 is held by banks, with office property loans being particularly at risk.

Data from the Federal Reserve System shows that since the beginning of 2024, banks have significantly reduced their loan exposure to commercial real estate, particularly in construction and land development loans. The FDIC's report for the first quarter of 2025 indicates that large banks have a commercial real estate delinquency and non-performing loan rate of 4.65%, the highest since 2014. Banks prefer to hold low-risk assets such as U.S. Treasury securities to protect their capital adequacy ratios. This retreat reflects concerns about economic uncertainty, especially for regional banks, whose commercial real estate loans account for as much as 40%-50% of their assets (FDIC data).

Similar to corporate debt, the commercial real estate market generally adopts a "extend and pretend" strategy. Banks avoid defaults and maintain the book value of assets by modifying loan terms (such as extending maturity dates or lowering interest rates). For example, an office building that is half-vacant may still be valued at its pre-pandemic fully leased value, postponing the recognition of losses. In 2023, the Federal Reserve, FDIC, and OCC jointly encouraged banks to avoid a wave of defaults through loan restructuring, and this regulatory leniency further fueled the market's avoidance of price discovery.

The tightening of commercial real estate is an underappreciated crisis. High default rates and bank withdrawals indicate that the market is nearing a critical point, especially in office properties. While loan restructurings allowed by regulators have avoided a short-term collapse, they have created a zombie market where asset values are disconnected from reality. The massive debt maturing by 2025 will force the market to confront price discovery, potentially leading to capital shortages in banks and systemic risks for regional banks.

Federal Reserve's Policy Response

Federal Reserve Governor Christopher Waller proposed early interest rate cuts in July 2025, citing that the labor market is "on the edge." The nonfarm payroll report for June 2025 showed an increase of 147,000 jobs, but half of them came from the public sector, with the private sector showing weak performance. The average weekly hours worked by production and non-managerial employees dropped to the second-lowest level since the pandemic, indicating a decline in consumer purchasing power. The Philadelphia Fed's 2025 report further noted that while the rate of overdue bank loans is slightly below historical highs, the scale of debt write-offs has reached a new peak, reflecting potential pressures in the credit market.

The Federal Reserve maintained the federal funds rate at 4.25%–4.50% during the June meeting, but lowered its economic forecasts: the GDP growth expectation for 2025 was reduced from 1.7% to 1.4%, and the core PCE inflation expectation increased from 2.8% to 3.1%. Waller's proposal for rate cuts contrasts with the cautious stance of some officials, such as Mary Daly, but the Fed's Beige Book did not mention inflation and instead focused on layoffs, highlighting concerns about economic slowdown. The head of the Port of Los Angeles recently warned that companies are heavily borrowing to stockpile inventory due to tariff concerns, which may further exacerbate financial pressures.

Waller's proposal for interest rate cuts indicates that the Federal Reserve is beginning to confront economic weakness, but monetary policy struggles to address the structural issues of corporate debt and commercial real estate. Lowering interest rates may boost the stock market in the short term, but it could also exacerbate inflation or further delay price discovery, extending market uncertainty. The Federal Reserve needs to find a balance between stimulating the economy and avoiding asset bubbles, and its historically lagging responses may undermine the effectiveness of its policies.

Systemic Risks of Private Equity

Private equity has played a key role in the tightening of corporate debt in the U.S. After 2008, the low interest rate environment allowed private equity firms to borrow at low costs, accumulating debt exceeding $1.2 trillion (PitchBook data). These firms achieved short-term gains by acquiring companies and using leverage (such as stock buybacks or asset divestitures), but at the cost of long-term stability. By 2025, high interest rates and an economic slowdown have laid bare the vulnerabilities of these firms, leading to an increased risk of defaults.

Systemic risk arises from the connections between private equity, corporate debt, banks, and the broader financial markets. The bankruptcy of a high-profile company could trigger a reassessment of risk across the entire industry, leading to a chain reaction of asset value re-evaluations. Moody's points out that companies with the lowest credit ratings typically have only two options: bankruptcy or restructuring, but the current market incentivizes all parties to avoid these two choices.

The excessive leverage of private equity is a ticking time bomb, and its opacity exacerbates systemic risk. Once a wave of defaults is triggered, it could affect banks, the bond market, and investor confidence. Regulators should reduce risks by mandating the disclosure of leverage levels and strengthening lending standards; otherwise, a single event could trigger a systemic crisis similar to that of 2008.

The Missing of Price Discovery and Its Consequences

The lack of price discovery is the core issue behind the tightening of corporate debt and commercial real estate in the United States. Banks, corporations, and regulators maintain the overvaluation of assets through a strategy of "extend and pretend" to avoid a massive asset sell-off similar to that of 2008. An FDIC report indicates that banks have unrealized bond losses totaling $413.2 billion, and if commercial real estate loans were marked to market value, the capital shortfall could further widen. Corporate bankruptcies would also expose the true value of leveraged assets, potentially triggering a market adjustment.

This strategy relies on hopes of an economic soft landing, but the data for 2025—slowing GDP growth, a weak labor market, and inflationary pressures—suggests that this outlook is bleak. Once price discovery occurs, whether through defaults, forced sales, or regulatory intervention, it could lead to bank capital pressures and market turmoil.

The absence of price discovery creates a false sense of stability, but this fragility cannot last indefinitely. Regulatory tolerance and market optimism mask the true state of asset values, but maturing debts and an economic slowdown will force the market to face reality. The arrival of price discovery could trigger systemic shocks, particularly for regional banks and private equity investors.

Conclusion

The U.S. financial market in 2025 is facing the dual challenges of corporate debt tightening and commercial real estate contraction. Excessive leverage in private equity, a wave of commercial real estate defaults under high interest rates, and a weak labor market collectively form a fragile financial ecosystem. Possible signals of interest rate cuts from the Federal Reserve reflect an awareness of economic weaknesses, but they do not address deep structural issues. Data such as rising CMBS default rates, bank retreats, and an expansion in the scale of debt write-offs indicate that the market is approaching a critical point.

The "extend and pretend" strategy has delayed the crisis but increased systemic risk. A single event—such as a major bankruptcy or a wave of commercial real estate defaults—could break this balance, triggering asset revaluations and market turmoil. Policymakers need to address potential crises by increasing transparency, tightening lending standards, and tackling fiscal imbalances. Otherwise, the financial markets in 2025 could face a challenge beyond that of 2008, testing the resilience of the U.S. economy.