By Martin Baccardax

Investors are starting to see cracks in high yield debt pricing, tied in part to a pair of high-profile bankruptcies in the automotive lending space, that could suggest weakness in one of the key planks of the broader equity market rally.

The chapter 11 filing for auto parts supplier First Brands, and the planned liquidation of used car dealer and lender Tricolor Holdings, have rattled private credit markets and added a new layer of uncertainty into the market for riskier bonds issued by publicly traded companies.

That could prove crucial to the broader financial market participants, who have pinned at least a portion of their bullish narrative to the low interest rate premiums investors demand from both highly rated and lower-rated companies when providing corporate loans.

So-called tight credit spreads, a term used to describe the small premium that investors demand to hold riskier corporate bonds instead of government debt, are often seen as a good barometer of company balance sheets. That can boost confidence in both the quality of corporate earnings as well as the value of publicly-listed stocks in general.

On the flip side, however, high demand for both public and private debt can allow some companies with questionable credit profiles to issue bonds with weaker protective guardrails for investors.

Both conditions are important in a market where investors are asking increasingly pointed questions over the nature and arrangement of artificial intelligence financings and fretting over the historically high valuations carried by benchmark indexes such as the S&P 500 and the tech-focused Nasdaq.

JP Morgan CEO Jamie Dimon, speaking after a solid third quarter earnings report for Wall Street's biggest bank that also included a $170 million hit from its exposure to Tricolor, suggested the recent bankruptcies could be a sign of more weakness to come.

"When you see one cockroach, there are probably more," Dimon told reporters on a conference call Tuesday. "First Brands I'd put in the same category, and there are a couple other ones out that I've seen that I put in similar categories."

"There clearly was, in my opinion, fraud involved in a bunch of these things," he added. "But that doesn't mean we can't improve our procedures."

The SPDR Bloomberg High Yield Bond ETF, a benchmark for riskier debt pricing, edged 0.2% lower in early Tuesday trading to change hands at 96.73. That move extends its one month decline to around 1.3%, and marks one of its biggest declines since the "Liberation Day" selloff in early April.

Curiously, however, a survey published this week by Bank of America suggests investors are still relatively bullish on public credit markets, both in terms of investment grade bond and high yield bond exposures, heading into the final months of the year.

That view was echoed by BlackRock CEO Larry Fink, who told CNBC Tuesday that, even with the First Brand and Tricolor bankruptcies, "we're not seeing any remarkable changes in credit trends across the board."

"Most private credit is no different to the type of lending you would do at a bank," he added. "There are going to be failures, and where there are failures with bad leadership and questionable accounting practices, that ultimately shows up."

Tracy Chen, a portfolio analyst at Brandywine Global, sees it differently.

"Individually, these could be dismissed as isolated cases of poor underwriting," she said of the First Brands and Tricolor bankruptcies. "But together, they potentially reflect rising distress among subprime borrowers, even as the broader economy remains stable."

She suggests investors watch movements in private equity stocks and regional U.S. banks, as well as changes in the spreads demanded by lenders in the high yield debt and auto and credit card loan markets.

"So far, we have seen private equity stocks underperforming and a slight decline in regional bank stocks, while the other two indexes are still benign," Chen said.

"However, a coordinated move across all four metrics would suggest that today's localized stress is turning systemic," she cautioned.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 14, 2025 14:41 ET (18:41 GMT)

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