Investors on Edge as Low-Rated US Junk Bonds Face New Challenges
Investors in junk bonds are becoming increasingly apprehensive about risk. An index of CCC rated bonds in the US has declined by nearly 0.8 percent over the month ending Thursday, lagging behind the broader high-yield market as investors are increasingly steering clear of the riskiest debt. At the close of October, distressed US dollar loans surged to $71.8 billion — marking the highest level since President Donald Trump articulated his tariff policy in April. Spreads between US investment-grade bonds and junk have widened over the last week, indicating that investors are opting for safer bonds rather than high-yield notes. “There is a greater level of caution at the first whiff of potential problems right now,” said Steven Oh.
The junk bond market is certainly not collapsing. Spreads on the securities remain beneath their average for 2025. Throughout much of the year, high-yield bond spreads have defied downward pressure, despite indications of possible challenges on the horizon. In July, investors flocked to CCC bonds, disregarding a caution from Jamie Dimon, who remarked that credit spreads were “a little unnaturally low.” In September, risk premiums on high-yield bonds approached their lowest levels of the year, despite the bankruptcy filing of car parts maker First Brands Group, which had engaged in the leveraged loan market, amid allegations of fraud. Tricolor Holdings, a used car seller that had borrowed in the asset-backed market, filed for bankruptcy that month amid allegations of fraud. The recent decline in junk bonds indicates that the debt is unlikely to experience a perpetual rally, especially concerning the most precarious securities. Spreads on CCC debt increased by approximately 27 basis points from October 31 through Thursday, in contrast to an average of 13 basis points for all high-yield debt, according to data.
The additional compensation that investors require for holding blue-chip BBB rated bonds, in contrast to more speculative BBs, increased by 11 basis points during that timeframe. Some market observers note that investors are not entirely steering clear of all CCC bonds; instead, they are cautious about credits that have recently been downgraded to CCC and are currently on a downward path. “The fact that investment-grade spreads are still close to historical levels of tightness — at 81 basis points as of Thursday’s close — and high-yield spreads aren’t, is a trend to watch,” said Mike Schueller. More consumer-related sectors within high-yield are weakening, such as subprime lenders and retailers that serve lower-end consumers, he added. According to the sources, distressed bond supply has “swung wildly” this year, rising to $100 billion in April from $50 billion in January. In October, supply continued its upward trend for the second consecutive month, remaining around $72 billion. Although still somewhat mild, earlier instances of distressed supply breakouts from troughs have indicated the onset of a “notable bout of risk aversion,” analysts Philip Brendel and Negisa Balluku noted.
In the leveraged loan market last month, four deals were put on hold, following the trend of August and September, which experienced six deals being withdrawn. On Thursday, reports says that Energos Infrastructure has postponed a $2 billion junk-debt sale, as the company faced challenges in attracting investor interest. In October, investors withdrew $1.3 billion from bank loan exchange-traded funds, marking the largest monthly outflow from the sector since April, as per data. Considering all factors, there appears to be valid justification for investors to exhibit increased caution at this time. “What sticks out to me is that while the share of distressed debt is small on a historic perspective, it’s quite large compared to prior periods when you’ve had very tight spreads,” said Winnie Cisar.
