From the Desk

Concerns that U.S. credit conditions may be deteriorating spiked after the head of J.P. Morgan stated a sobering warning. In commenting on credit defaults, Jamie Dimon suggested that once you see one, more may be lining up. Certainly, there have been some high-profile stress and blowups in auto parts and subprime car lending. A combination of company fraud allegations and deterioration in the borrower base were the culprits.

Subprime lending is, by its nature, aimed at consumers with spotty credit histories. And stress there can be an early alert of more to come in the broader economy. But the number and nature of credit episodes so far is not conclusive. Are these just a few idiosyncratic events or the start of a trend? If you pull back and look across the wider economy, a lot of other signals are less concerning. U.S. recession risks have abated. Company bankruptcies are coming down and the outlook for next year is benign. And personal bankruptcies, although slowly edging up, are low and well below median levels. Therefore, on balance things look fairly robust.

But an emerging risk is the potential damage from an extended government shutdown. In a real time indicator of stress, food banks across the U.S. are seeing an uptick in visits from furloughed federal workers. And in another potential blow to households, federal food programs are expected to run out of funding by the end of the month unless the government reopens. That could force households to make hard decisions on what bills are left unpaid, from credit cards to car loans to mortgages. So, we need to stay alert to where this is heading as the government remains closed and paychecks are held back.

Sources: Bloomberg, NBC News, Financial Times, 2025.

The subprime auto sector could represent one of the most attractive spaces in fixed income right now, and we’re examining the recent widening in the sector for potential investment opportunities. We view the recent highly publicized allegations of fraud concerning one lender as idiosyncratic – particularly the lender’s double pledging collateral and targeting undocumented consumers – and not indicative of the broader industry. In fact, Moody’s just upgraded 15 different subprime auto bonds this week, which we feel is more indicative of the fundamental performance of the broader market.

Subprime auto securitizations are constructed to build substantial credit support every month. So, although subprime consumers have had weaker loan performance data than prime borrowers over the last few months, the securitizations post the global financial crisis are built to withstand a far higher degree of losses than we are seeing. This hangs with Moody’s stated rationale for the recent upgrades, as the agency states in its report that, “The upgrade actions are primarily driven by the buildup of credit enhancement due to structural features including a sequential pay structure, non-declining reserve account and overcollateralization.”

Further in the report, Moody’s guides us to reasons why it would upgrade these securitizations, such as stating that, “Levels of credit protection that are greater than necessary to protect investors against current expectations of loss could lead to an upgrade of the ratings.” While the substantial number of upgrades in the sector recently this week do not generate as many headlines, the more important, if less flashy, story in subprime auto asset backed securities is that most deals are performing well in line with expectations.

Source: Moody’s, 2025. 

In the first half of the year, disasters from extreme weather in the U.S. caused more than $100 billion in damage in the country, the most expensive start to any year on record. This included more than $60 billion in costs related to the L.A. wildfires in January. The vast majority of damaging events were severe storms, often bringing tornadoes, hail and flash floods.

Globally however, economic losses from extreme weather are lower than decadal averages. Q3 is typically the most expensive three-month stretch of the year – but not in 2025. Last year, Hurricane Helene dumped 1-in-1000-year levels of rainfall in North Carolina. This year, the U.S. has not yet had a hurricane make landfall, although Typhoon Halong recently hit western Alaska off the Bering Sea. Projections for tropical cyclones in the Atlantic to make landfall did not materialize.

All of this speaks to the increasing volatility and deviation from historical baselines in weather. Climate change isn’t the sole cause of the rising price tag from weather events – as more people and businesses move into areas prone to extreme events, there is greater asset exposure to damage. Those who treat adaptation as an easy solution downplay the scale. Consider wildfires. In the U.S., there are more than 60,000 densely populated communities adjacent to wildlands considered at risk of fire.

Hotter temperatures amplify extreme events. Hurricanes accelerate faster, with less time for us to prepare for landfall. Wildfires can spread farther and faster. Rainstorms can dump more water in shorter bursts, leading to floods. Infrastructure built for a cooler climate is at risk as extreme weather events occur with greater intensity. As historic emissions already in the atmosphere continue to increase temperatures, that risk – and the costs – are likely to increase as well.

Sources: Bloomberg, Climate Central, Gallagher Re, U.S. Fire Administration, 2025.