Distressed leveraged loans have reached their highest level since March 2020, and the riskiest tier of high-yield debt pays more than 10 points over Treasuries. The broad high-yield spread narrowed this month.
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Look at the headline measure of U.S. junk-bond risk and the credit market appears steady. Look at its bottom tier and it does not.
The option-adjusted spread on the ICE BofA U.S. high-yield index, the extra yield investors demand over Treasuries, stood at 3.03 percentage points on . It was 3.24 points on , so it has narrowed by about 0.21 point this month. The largest high-yield bond ETF slipped just 0.12% on Wednesday.
The distressed pile
Beneath that, stress has built. Leveraged loans quoted below 60 cents on the dollar now total about $65 billion, up from $40 billion a year ago and the most since March 2020, according to JPMorgan strategists. Loans at or below 80 cents total about $139.8 billion, roughly $4 billion short of the peak reached in May 2020.
Technology companies account for 39% of the distressed loans. Spreads on CCC-rated bonds, the lowest tier of high yield, are above 10 percentage points, the widest since the regional-bank stress of 2023, and CCC yields stand at about 15.58%.
The bank's strategists expect default rates to rise. They forecast high-yield bond defaults of 2.75% in 2027 and leveraged-loan defaults of 4.5%, up from 2.25% this year.
Rates and refinancing
The pressure lines up with the level of borrowing costs. The 10-year Treasury yield touched a 24-year high of 5.36% overnight, and companies that borrowed at lower rates face refinancing at much higher ones. A CCC borrower rolling debt today would pay more than 15%.
JPMorgan Chief Executive Jamie Dimon said this week that rising government bond yields and heavy AI investment could spill over into corporate credit markets.
New supply is coming. Broadcom is working to arrange more than $50 billion of financing tied to chips for OpenAI, according to people familiar with the talks, and the cost of insuring SpaceX debt against default has risen to record highs as the company lines up its own chip financing.
Is Credit Stress Spreading?
One reading is that higher-for-longer rates are hitting a refinancing wall in the weakest, most software-heavy part of the market first, and that the distress will spread upward as more debt comes due.
Another reading is that the stress is concentrated in companies whose business models are being disrupted by AI. The broad spread has narrowed this month and the main high-yield fund barely moved, which suggests the rest of the market is not pricing contagion.
What would show spillover
A widening in the broad high-yield spread from near 3 points would be the clearest sign. Default announcements outside technology, and the terms on the large AI financings when they price, will show whether the bottom tier's problems are staying contained.