The American Dream Accelerates Away From Those in the Slow Lane

livemint.com:

Much of America’s two-speed economy is powering ahead, but it’s left a trail of destruction behind it. The laggards are starting to get into serious trouble, with the worst-hit, low-income consumers held back by powerful forces: higher interest rates, inflation and the depletion of pandemic-era support. This is terrible news for those left behind, and bad too for investors in the companies that sell to them.

It’s also hitting companies that are laggards themselves, indebted and caught out by changes in the economy. Here’s why: Higher rates hit selectively. Those who borrowed or refinanced at pandemic-era near-zero rates—companies and homeowners with both sense and a solid credit score—haven’t been hit by the highest rates in four decades.

Who has been hit hard: Borrowers who didn’t qualify for long-term fixed-rate loans and people who want to borrow now. Borrowers with lower credit scores take loans that are more expensive and often don’t have fixed rates. Credit-card rates soared as the Fed tightened, from a postpandemic low of 16% to almost 23% for borrowers who don’t pay in full each month.

The same goes for firms. Low-rated junk-bond issuers continued to issue short-dated bonds in 2021 while sturdier investment-grade companies locked in low rates for, on average, the longest this century. Since then, yields on CCC bonds, which are close to default, have doubled to 13%.

According to ratings agency Moody’s, junk-rated borrowers were much more likely to be downgraded even further last year, a sign of their difficulties, than were investment-grade borrowers. Heavily indebted firms typically have to roll over debt frequently—which has become much more expensive. For relatively healthy businesses, higher debt costs hit