U.S. junk debt spreads widen as Treasury sell-off hits weakest borrowers

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Junk debt spreads widen

Highlights

U.S. 10-year Treasury yields reached 4.82 per cent this week, driving CCC-rated junk bond spreads to 10.53 points from 8.08 points a year earlier.
Default actions among lowest-rated U.S. borrowers rose 9 per cent year-on-year to $40.1 billion, with the cable and satellite sector leading defaults, including Dish DBS’s $9.75 billion default.
Widening spreads and low recovery rates—currently 29 per cent versus the 25-year average of 40 per cent—highlight growing risk and bifurcation in U.S. credit markets as borrowing costs surge.

Credit stress builds as yields rise

As reported by Financial Times, borrowing costs for the riskiest U.S. companies are rising as the recent Treasury sell-off lifts benchmark rates across global dollar markets. U.S. 10-year yields reach 4.82 per cent this week, their highest level since 2023, as persistent inflation concerns and heavy borrowing by governments and AI companies fuel a broader bond rout.

The extra yield paid by companies rated triple-C or lower rises to 10.53 percentage points, from 8.08 percentage points a year earlier. Investors say higher rates are making it harder for weaker businesses to refinance debt, while increasing the risk of market dislocation.

John Cocke, deputy chief investment officer of credit at Corbin Capital Partners, says there is broad pessimism at the least creditworthy end of credit markets. He adds that aggressive debt restructurings in recent years have also damaged investor confidence in highly leveraged companies.

Default actions among borrowers, most of them involving companies with very low credit ratings, are up 9 per cent this year from 2025 to $40.1 billion, according to JPMorgan analysts. JPMorgan also says recovery rates on defaults over the past 12 months stand at 29 per cent, below the 25-year average of 40 per cent.

The cable and satellite sector records the highest volume of default actions, including Dish DBS’s $9.75 billion default in June, the second largest since the pandemic. Industrials, paper and packaging follow behind.

Market split deepens across U.S. borrowers

Conditions for the weakest issuers contrast with steadier spreads for higher-rated U.S. borrowers, supported by strong corporate earnings and resilient economic growth. Investors describe the credit market as increasingly split between companies still benefiting from solid demand and those struggling under a higher-rate environment.

John Stopford, head of multi-asset income at Ninety One, says the U.S. credit market is bifurcated, with higher-rated companies priced at extremely rich levels while junk-rated bonds look more fragile. He says the widening in junk spreads reflects concern that these companies have become more marginal as borrowing costs rise and could act as an early warning signal for a wider sell-off in risky assets.

Some investors warn that elevated Treasury yields are likely to expose more weak points in credit markets. John Roque, head of technical analysis at 22V Research, says sharp moves higher in the 10-year yield tend to break something in markets, while Henry Song, a portfolio manager at Diamond Hill, says companies built in the era of near-zero interest rates are not structured to withstand higher borrowing costs for a prolonged period.

Futures pricing suggests the Federal Reserve is expected to raise interest rates two or three more times before the end of 2027 as AI-driven growth remains strong and inflation stays above the central bank’s 2 per cent target. That outlook keeps pressure on businesses that borrowed heavily before the Covid pandemic and now face refinancing at much higher rates.

In our earlier article on long-term U.S. Treasury yields staying near multi-year highs, we explained how persistent fiscal deficits, policy uncertainty, and reduced central-bank buying are keeping investors demanding higher compensation to hold long-dated government debt. We also noted that heavy AI-related borrowing by large tech firms and data-center vehicles is intensifying competition for capital, helping push yields higher and tightening financial conditions across the economy.

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