3 hrs ago
Riskiest US Corporate Debt Turns Distressed Amid Rising Yields
The riskiest company bonds in the United States have become much more expensive to trade.
Investors now demand an extra 1,007 basis points compared with safer government bonds.
This is the widest gap since the regional banking crisis in March 2023.
A wider gap means investors are more worried that some companies may fail to repay their debts.
Higher interest rates make borrowing and refinancing more difficult for heavily indebted companies.
Smaller companies can also be hurt by inflation and rising energy costs.
Many of the weakest bonds are connected to technology, media, telecommunications, cable and satellite businesses.
However, not every CCC-rated bond is performing badly.
Analysts said problems among these riskiest bonds may not spread to the entire high-yield bond market.
CCC-rated US corporate bonds reached a 1,007-basis-point spread over Treasuries on Wednesday.
The spread was up from 860 basis points at the start of September and was the widest since March 2023.
Investors are concerned that higher interest rates and global yields will raise borrowing costs and refinancing risks.
More than half of the worst-performing CCC bonds are in technology, media and telecommunications, especially cable and satellite companies.
CCC-rated companies represent about 8.5% of the US high-yield index, while higher-rated bonds have remained relatively stable.
- Who
- US companies with CCC credit ratings, bond investors, Federal Reserve policymakers and analysts from Charles Schwab Corporation, Barclays plc and Franklin Templeton Inc.
- What
- Spreads on the riskiest US corporate bonds rose above 1,000 basis points over Treasuries, signaling increased concern about defaults, restructurings or losses.
- Where
- The US corporate bond market.
- When
- On Wednesday; the spread was the widest since March 2023.
- Why
- Investors are responding to higher global yields, anticipated tighter monetary policy, refinancing needs, inflation and rising energy costs.
Limited Spillover View
Default Risk View
Impact on the broader bond market
Limited Spillover View
The distress is concentrated within the CCC segment, and continued pain there does not necessarily need to spread to all high-yield bond investments.
Default Risk View
Strategists warn that higher interest rates could expose troubled debt and trigger a fresh wave of defaults or restructurings.
Condition of CCC debt
Limited Spillover View
Not all CCC debt is suffering, and performance varies significantly by bond, company and sector.
Default Risk View
The weakest CCC issuers are especially vulnerable because they face higher debt-service costs, refinancing difficulties and pressure on profits from inflation and energy prices.
Key facts
- CCC spread
- 1,007 basis points over Treasuries on Wednesday
- September spread
- 860 basis points at the start of September
- Previous peak period
- The widest spread since March 2023, during the regional banking crisis
- CCC index share
- About 8.5% of the US high-yield index, down from 9.7% a year earlier
- Most affected sectors
- Technology, media and telecommunications; cable and satellite companies were the biggest laggards
- Main pressures
- Higher interest rates, refinancing needs, inflation and rising energy prices
- Higher-rated bonds
- Spreads have held relatively steady despite soaring global yields and slumping equities
Quotes
Tatiana Darie
Macro strategist for Bloomberg’s Markets Live.
“The junkiest names are selling off, reflecting concern that years of restructurings and kicking the can down the road on troubled debt will finally come home to roost as interest rates go up, triggering a fresh wave of defaults.”
livemint.com
“Historically, when the Fed hikes into higher energy prices bad things happen to the economy.”
livemint.com
Collin Martin
Head of fixed income research and strategy at Charles Schwab Corp.
“The key driver is the economy is doing well but not necessarily going gangbusters. Triple C rated issuers are the riskiest issuers out there, and they tend to be the most sensitive to changing interest rates.”
livemint.com
Sources
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