Are We Facing a 2007-style Credit Bubble in 2025?

The question of whether a 2007-style credit bubble is emerging in 2025 demands a nuanced analysis of corporate and consumer leverage, debt quality, and systemic vulnerabilities. While the 2007 crisis was fueled by uncontrolled debt accumulation and speculative excess, today's credit markets exhibit a more cautious profile. However, sector-specific risks and lingering fragilities—particularly in subprime consumer lending and non-bank finance—suggest that complacency is not warranted.

Corporate Leverage: A Mixed Picture

Corporate debt levels in 2025 remain elevated but have trended downward since 2024, with business debt-to-GDP ratios now at their lowest in two decadesThe Fed - Borrowing by Businesses and Households^[1]. This contrasts sharply with the rapid debt accumulation seen in 2007, when non-financial corporations drove a surge in borrowing for speculative investments. Today, corporate debt is increasingly used for refinancing and shareholder payouts rather than capital expendituresConsumers taking on more debt in 2025^[2].

The high-yield debt market, however, remains a focal point of concern. Starting yields are high, and leveraged loan markets benefit from robust investor demand, with projected returns of 7.5–8.0% in 2025U.S. Leveraged Credit in 2025^[3]. Yet, trade tensions and macroeconomic uncertainty have dampened M&A activity, leading institutions like Bank of America to revise downward their forecasts for these marketsBofA lowers US high-yield, leveraged loan projections^[4]. The aging credit cycle and exposure to capital-intensive sectors also amplify risks, particularly as interest rates remain elevated.

Consumer Leverage: Caution Amidst Strain

Consumer leverage ratios in 2025 are lower than pre-pandemic levels, supported by high home prices and refinancing activityThe Fed - Borrowing by Businesses and Households^[1]. However, subprime auto borrowers are showing signs of distress, with delinquency rates hitting a 30-year highConsumers taking on more debt in 2025^[2]. The end of the student loan repayment moratorium has further strained credit scores for millions, potentially triggering a wave of delinquenciesConsumers taking on more debt in 2025^[2].

While households today hold stronger equity cushions compared to 2007, the uneven distribution of financial health—particularly among lower-income borrowers—remains a vulnerability. Regulatory scrutiny of subprime lending practices has intensified, but the scale of outstanding debt in these segments cannot be ignored.

Sector-Specific Risks and Non-Bank Finance

The leveraged loan market's default rates in 2025 (3.4% for U.S. loans) are modest compared to the crisis-era spikes but reflect heightened sensitivity to interest rates and trade policyUS and Euro HY Default Rates: July 2025^[5]. Fitch Ratings emphasizes that leverage and liquidity remain central to credit risk assessments, with non-bank financial institutions (NBFIs) facing amplified stress if macroeconomic conditions deteriorateReframing Tight Spreads in Leveraged Credit^[6].

The 2007 crisis was exacerbated by opaque leverage in non-bank sectors, a dynamic that persists today. Financial authorities continue to monitor NBFI risks, particularly their interlinkages with systemically important institutionsLeverage in Nonbank Financial Intermediation^[7]. While regulatory improvements have enhanced transparency, the complexity of modern credit markets means vulnerabilities could still emerge in unexpected ways.

Conclusion: A Cautionary Optimism

The 2025 credit landscape is not a mirror of 2007. Corporate and consumer leverage ratios are more moderate, and regulatory frameworks have evolved to address systemic gaps. Yet, the concentration of risk in subprime lending, leveraged loans, and non-bank finance suggests that the system remains fragile.

Investors must remain vigilant. While the likelihood of a full-scale bubble is low, localized stressors—such as trade policy shifts or a sharp rise in interest rates—could trigger sector-specific corrections. The key lies in balancing the current market's resilience with a clear-eyed view of its vulnerabilities.