Kelechukwu Mgboji 
United States corporate borrowers, particularly those at the lower rungs of the credit spectrum, are heading into turbulent waters as Deutsche Bank warns of a fresh wave of defaults fueled by unrelenting interest rate pressures and softening economic momentum.
In a note released recently, the German lender projected that default rates among US speculativegrade companies—commonly known as high-yield or junk-rated issuers—would tick up from the current 4.7 per cent to 4.8 per cent by the second half of 2026.
While modest in scale, the uptick signals a reversal of the recent default decline, as higherfor-longer interest rates begin to exert cumulative pressure on leveraged balance sheets.
Deutsche Bank analysts pointed to a confluence of monetary, macroeconomic, and creditmarket dynamics converging to threaten US corporate credit health.
Chief among them is the Federal Reserve’s resolute stance on maintaining elevated borrowing costs in its bid to quell persistent inflation, even as GDP growth decelerates and recession risks loom.
“Either weaker growth and/or higher rates should prevent US defaults from falling in 2026,” the bank said, noting that the US 10-year Treasury yield is expected to soon surpass nominal GDP growth—a rare occurrence last seen outside of the pandemic since 2011.
Currently hovering around 4.5 per cent, the 10- year yield remains elevated, with Fed policymakers showing little inclination to ease rates absent a labor market deterioration.
“The Fed is unlikely to provide rate cuts before job cuts,” Deutsche added pointedly. The backdrop is made more precarious by tightening bank lending standards and growing uncertainty over the future tax treatment of corporate finance, especially for multinational firms operating within the US.
According to Reuters tax reforms under consideration in Congress—specifically the controversial Section 899—could further amplify corporate borrowing costs.
Section 899, embedded deep within a recent Budget Committee report, risks upending long-standing exemptions on portfolio interest for foreign investors.
While Treasuries and corporate bonds may retain their shield under current interpretations, ambiguity persists. “There’s still considerable uncertainty about this point,” cautioned Michael Zezas, strategist at Morgan Stanley.
The implications for foreign capital flows are profound. If multinational firms face new taxes on intercompany loans or dividend payments, investment incentives could erode swiftly.
“Those companies will not be paying US tax whatsoever because they will not be able to operate in that punitive, high-tax environment,” warned Jonathan Samford, president of the Global Business Alliance.
Morgan Stanley added that this may spur repatriation of profits, exerting pressure on the US dollar and elevating corporate borrowing costs.
Foreign banks, in particular, may pass tax-related costs onto US firms via pricier credit facilities. Lawmakers, meanwhile, are scrambling to contain the fallout.
Senator Steve Daines, a Republican on the Finance Committee, acknowledged the potential for unintended harm. “We want to make sure we don’t have tax policies that in some way would diminish the fact that we are the gold standard in the world,” he said.
Until such clarity emerges, the specter of rising defaults, capital flight, and costlier debt may hang over U.S. corporate credit markets—an ominous trifecta for an economy already flirting with slowdown.
