Historically, whenever interest rates are cut following a hiking cycle, lending standards actually tend to tighten or remain at elevated levels. Lending standards only begin to ease once interest rates have been cut sufficiently.

This means that liquidity doesn’t simply loosen just because rates are cut; it only begins to flow once we reach a low-interest-rate environment.

This is due to the labor market and corporate bankruptcies.

1. As the labor market weakens, delinquency rates increase.
2. As corporate bankruptcies rise, investing firms and banks suffer capital losses.

Since interest rate decisions are made based on lagging indicators, the decisions themselves are even more lagging, meaning they are inevitably always late.

Currently, the labor market continues to weaken. The trend is shifting from “low hiring, low firing” to “severely low hiring, high firing.”

There is a high probability that the unemployment rate will rise in the future. Consequently, delinquency rates are also expected to keep climbing. Delinquency rates for credit cards, auto loans, and student loans are already heading toward Lehman Brothers crisis levels.

The number of “zombie companies”—those unable to cover interest expenses with their earnings—has seen the largest increase since 2022.

On top of this, High Yield (HY) bonds issued during the low-interest COVID era will begin to mature in earnest starting in 2026.

(I saw a graph but I can’t find it now… The issuance volume nearly doubles from 2025 to 2026 and continues to increase until 2028.)

Investment Grade (IG) companies, which are much more solid than junk-rated ones, will start issuing bonds on a large scale starting in 2025.

Since HY-rated companies must offer higher interest rates than IG-rated companies, HY rates will spike starting in 2026. This will worsen the funding crunch for HY companies, leading to a significant number of bankruptcies.

If this happens, the combination of rising delinquency rates and increased HY corporate bankruptcies will wipe out unprofitable companies, causing capital losses for commercial banks, investment banks, and private equity funds.

Even looking at just these factors, it is highly likely that liquidity will shrink due to tightened lending standards, even if interest rates are cut.

Furthermore, Big Tech and hyperscalers are currently seeing their cash flows dry up, and corporate bonds aren’t enough to cover costs. If the AI investment cycle hits a peak under these conditions, the stock market will lose its upward momentum.

(Cash flows are already insufficient to handle capital expenditures, so they are raising funds from the private sector via corporate bond issuance to invest in the future.)

Summary

• When rates are cut, lending standards tighten or remain high. Liquidity only begins to flow once rates reach a low level.
• Rising delinquency rates due to labor market weakness + bankruptcies of junk-rated companies are at their highest increase since 2022.
• Maturities for HY corporate bonds issued during the low-rate COVID era return starting in the high-interest environment of 2026 (Massive HY bond issuance pending from 2026 to 2028).
• Due to the current AI investment cycle, IG-rated corporate bonds are flooding the market. HY bonds will have to face high interest rates + massive issuance competition starting in 2026 -> Increased probability of bankruptcy.
• Big Tech’s cash flow is also drying up, leading to massive corporate bond issuance for AI investment (Currently, AI is not generating returns relative to investment).
• For the reasons above, if market liquidity dries up, the peak of the AI investment cycle may be formed.