NEW YORK August 1, 2025: As the dog days of summer drag on in the Northern Hemisphere, the dynamics of government debt and credit risk are raising vexing questions, some of which seem to defy conventional analysis.
Part of the confusion arises from the Federal Reserve Bank’s deliberations on interest rates. Do disagreements about tariffs, inflation, and interest rates merely represent a fraying consensus, or could they suggest historical models economists have relied on for decades need to be updated? According to conventional economic theory, the “crowding out effect” of increased government spending and borrowing reduces private investment. But that is not how markets are behaving.
In our May commentary, we pointed out the demand for long-term government securities was shrinking amid concerns about deficit spending—especially in Japan, but also in Europe, the U.K. and the U.S. Concerns about governments spending beyond their means have resulted in weak demand for long-term bonds. For example, ahead of the recent elections in Japan, we saw a spike in their 10-to-40-year yields.
But the larger concern is the implications of government debt for market liquidity. While the rise in long government yields has not directly impacted the real economy, it has impacted capital allocation. We are seeing a reverse crowding out effect as investors move out of government bonds and into high grade corporates in the U.S. and Europe. In June, money managers pulled $3.9 billion from Treasuries while adding $10 billion to European and U.S. corporate debt, Bloomberg reported. In July, investors added another $13 billion to U.S. high-grade corporates. Investor sentiment appears to favor corporate debt as a vehicle that poses less risk less than its government counterpart as questions about government debt, the value of the dollar, and inflation continue to swirl about.
A second issue we are contemplating is where is credit risk rising year-to-date. Our data shows that the S&P 500 Health Care Providers & Services Index has the largest increase in default risk so far this year. The list of the largest increases in this sector over the past six months are shown in Table 1.
Table 1: Changes in the Default Risk: Healthcare Sector – Top 1000 US Companies by Market Cap; July 2025
Source: SAS Institute KRIS data service
Fundamentally, this is not a surprise, as the sector faces a number of operational and financial challenges, as well as regulatory changes, policy uncertainty, and technology risks.
Let’s unpack that. The Trump administration’s “One Big Beautiful Bill” raises questions about Medicare coverage and reimbursement rates. Commercial insurers are struggling with rising drug costs. Nursing shortages, burnout, and high turnover are driving up labor costs, contributing to margin pressure and uncertainty. In the U.S., shifts in Medicare and Medicaid policies concerning value-based care requirements, prior authorizations, telehealth, and staffing rules are amplifying uncertainty in the industry.
Health insurers and providers are also prime targets for ransomware and other cyberattacks. Ensuring compliance with changing privacy laws is costly, and providers face additional costs—as well as new risks—for AI tools used to manage data and operations.
Financially, revenue shifts from inpatient to outpatient services are forcing changes to the business model. Private equity firms have been increasing investments in healthcare, especially in home care, urgent care, and specialty practices. These investments are increasing competition in the sector and drawing regulatory scrutiny.
The barrage of changes in the healthcare industry introduce new revenue possibilities, but also raise concerns about revenue volatility, liquidity and solvency pressures, and increased capital costs—all against a background of a steepening yield curve. More than ever, lenders and investors need predictive data to adequately assess the risks and opportunities in this sector.
Our final comment is about the nonprofit participants in the industry, which are dependent upon tax-free financing and earnings from their investment portfolios. We have seen many adopting alternative investments, such as private equity or hedge funds. Given the pressure to fund capital projects from their investment portfolios, these organizations must carefully navigate the tradeoffs between higher yields and liquidity risks. This represents a substantial change in their risk profiles, as many have historically relied on fixed income for both yield and liquidity. Today’s market uncertainties only add to the risks investors must consider.
Contemporaneous Credit Conditions
The Kamakura Troubled Company Index® closed the month at 7.02%, down 0.84% from the prior month. The index measures the percentage of 42,500 public firms worldwide with an annualized one-month default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.
At the end of July, the percentage of companies with a default probability between 1% and 5% was 5.17%. The percentage with a default probability between 5% and 10% was 0.99%. Those with a default probability between 10% and 20% amounted to 0.66% of the total; and those with a default probability of over 20% amounted to 0.2%. For the month, short-term default probabilities ranged from a low of 6.93% on July 25 to a high of 7.63% on July 2.
Figure 1: Troubled Company Index®, July 31, 2025
At the end of July, the riskiest 1% of rated public firms within the coverage universe as measured by 1-month default probability included twelve companies in the U.S. QVC Group, Inc (NASDAQ:QVCGA) remained the riskiest rated firm in our universe, with a 1-month KDP of 46.54–up 2.47% over the past month.
Table 2: Riskiest Rated Companies Based on 1-month KDP, July 31, 2025
The Expected Cumulative Default Rate, the only daily index of credit quality of rated firms worldwide, shows the one-year rate of 0.47% down 0.05% from the prior month, with the 10-year rate down 0.43% at 7.26%.
Figure 2: Expected Cumulative Default Rates, July 31, 2025
About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 42,500 public firms in 76 countries that have an annualized one-month default risk of over one percent. The average index value since January 1990 is 13.96%. Since July 2022, the index has used the annualized one-month default probability produced by the KRIS version 7.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.
The KRIS version 7.0 models were developed using a data base of more than 4 million observations and more than 4,000 corporate failures. A complete technical guide, including full model test results and key parameters, is provided to subscribers. Available models include the non-public-firm default model, the U.S. bank model, and the sovereign model.
The version 7.0 model was estimated over the period from 1990, through the Great Recession and ending in February 2022. The 76 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.
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Editorial contacts:
- Martin Zorn – Martin.Zorn@sas.com
- Stas Melnikov – Stas.Melnikov@sas.com