A U.S. recession would tighten the credit market and could throw more than 8 percent of corporate bonds—about $920 billion worth—into distress, the last step before default, according to a client note from Bank of America (BoA) analysts.

A 15-percent default rate is “a distinct risk,” the note said, although it added that any new credit crisis would be milder than that during the Great Recession.

“The next three-year default cycle, whenever it starts, should add up to a lower peak,” the note said.

“If a full-scale recession doesn’t arrive in the next year or two, the cycle will get delayed but not canceled,” it pointed out. “A mild/short recession is a more likely outcome,” yielding an 8-percent default rate.

“A moderate pace of loss-gathering is already underway but has not yet reached a point to take us to 8 percent aggregate across all credit.”

The U.S. faces a 68-percent chance of a recession before April 2024, according to the Federal Reserve Bank of New York’s Recession Probability Index.

TREND FORECAST: The risk has sharpened due to the ongoing banking crisis, which has caused credit to tighten in several key markets, as we reported in “Loan Availability Has Tightened in Key Markets, Fed Report Shows” (25 Apr 2023).