After a record decade of economic growth in the U.S., the current expansion is becoming long in the tooth. S&P Global Ratings economists now place the probability of a U.S. recession within 12 months at between 25% and 30%. Although our baseline economic view is neutral, market participants are attempting to identify the most likely source of a potential economic stall, and some have turned their attention to the set of financial instruments that they believe were the primary cause of the 2007–2009 global financial crisis: U.S. structured finance products.

Broadly speaking, this $11.5 trillion market of securitized products includes bonds backed by cash flows from mortgages, consumer and commercial receivables, leveraged loans, and more. In terms of outstanding debt in the U.S., structured finance is second only to Treasury debt (over $16 trillion). Structured finance has been a widely used funding mechanism for over 30 years and is an established and well-developed part of U.S. fixed income markets that is likely to persist for years to come.

S&P Global Ratings recently undertook a stress test to estimate the impact of a potential market downturn on structured finance ratings. In this hypothetical recession scenario constructed to transpire over a three-year period, U.S. GDP contracts and growth stays negative for six quarters, unemployment exceeds 6% in the second and third years, and both U.S. fixed investment and export growth are assumed to be negative for the first two years. The contemplated recession affects global markets as trade slows and commodities markets weaken. Under this stress scenario, downgrade and default risks for most structured finance sectors and regions are anticipated to be contained to speculative-grade classes (rated 'BB+' or lower), with some risk in low-investment-grade classes, particularly in collateralized loan obligations (CLOs). This topic is explored in our Sept. 4, 2019, publication, "When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn?"