US monetary conditions are the tightest since 2009, financial conditions the tightest since 2009, and as Moody’s reports today Liquidity Stress is at its worst since February 2010 – all forewarning of a notable rise in defaults in 2016… and what can the Fed do?

Worryingly, as Credit Suisse explains, US monetary conditions are now the tightest that they have been since 2009…

…At a time when financial conditions are also moving to their tightest level since 2009.

This is the first time in 10 years that monetary and financial conditions are tightening at the same time. In the past, a tightening of financial conditions has tended to be accompanied by monetary easing… but The Fed seems set on hiking rates no matter what (to sustain bank earnings?)

However, as Moody’s reported today, things are worse still as their Liquidity Stress Index (LSI) jumped to 6.8% at the end of December 2015 from 6.4% in November, reaching the index’s highest level since February 2010 forewarning of a rise in the default rate in 2016.

The LSI for oil and gas increased to 19.6% in December from 19.3% in November as low oil prices continued to weaken liquidity and raise default risk. Among the four exploration and production companies downgraded to SGL-4, the weakest liquidity category, were Atlas Energy Holdings (Caa1 negative), California Resources Corp. (Caa1 negative) and Ultra Petroleum Corp. (Caa1 negative).

Liquidity weakness is also starting to spread to select lower-rated issuers in other sectors, though not broadly.

The non-oil and gas LSI rose to 3.6% in December from 3.0% in the prior month.

The ratio of all SGL liquidity downgrades to upgrades was 1.74 for 2015, with 141 downgrades to 81 upgrades — the highest since 2008 when the ratio was a record 2.96. Energy has been the key driver of liquidity downgrades, followed by metals and mining, amid weakening commodities demand in major developing countries such as China.

“As borrowing rates rise and credit markets tighten, companies closer to the margin will find it challenging to cost-effectively refinance their upcoming debt maturities.”

Moody’s forecasts the US speculative-grade default rate will climb to 4.1% in November this year from 3.0% in November 2015.

Which perhaps explains why US bank credit risk is soaring…