Riskiest US company debt hits highest risk level since 2023 banking crisis

The gap in yield between the riskiest US corporate bonds and safe government debt has crossed 1,000 basis points for the first time since the regional banking crisis in 2023. This high risk premium points to a strong chance of company defaults, debt restructurings, or money losses.

Debt Levels

Bonds rated CCC, which form the lowest tier of junk debt, traded at a spread of 1,007 basis points on Wednesday. This marks a sharp rise from 860 basis points at the start of September and reaches the widest gap seen since March 2023, when the collapse of Silicon Valley Bank and Credit Suisse shook markets.

Market Causes

Collin Martin, head of fixed income research and strategy at Charles Schwab Corp., notes that while the economy is doing well, it is not growing at a fast pace. Triple C rated companies face the highest risk and react most sharply to shifting interest rates. Spreads have climbed steadily since April as investors expected the Federal Reserve to tighten policy to fight inflation. Rising global yields make it harder for heavily indebted firms to pay interest and refinance loans, especially as a large volume of debt comes due. Tatiana Darie, macro strategist for Markets Live, warns that years of pushing troubled debt into the future are catching up to these weak firms. Smaller companies struggle more with high energy prices and inflation because they cannot easily pass those costs on to buyers, which squeezes profits. Jack McIntyre, global bond portfolio manager at Franklin Templeton Inc., points out that past Federal Reserve rate hikes during high energy price periods have caused economic trouble.

Sector Impact

Not all CCC debt is failing, though the weakest bonds drag down the entire group according to Barclays Plc. Over half of the worst-performing CCC bonds belong to the technology, media, and telecommunications sectors, with cable and satellite firms lagging the most. Corry Short, a strategist at Barclays, explains that performance varies greatly across different companies and sectors. CCC rated firms account for about 8.5% of the US high-yield index, which is down from 9.7% a year ago. Meanwhile, spreads for higher-rated bonds have stayed stable despite falling stock prices and high global yields.

Context

Bond spreads measure the extra return investors demand to take on the risk of lending money to companies compared to safe government bonds. When this spread widens past 1,000 basis points, it signals that the market views the borrower as facing a very real threat of failing to pay back its debt.