Troubling Signs for $425B Debt Wall as Optimism on Rates Fades


The strong jobs report in the US has increased the likelihood of another rate increase by the Federal Reserve, which is causing pain in credit markets already affected by a year-long rise in yields. This spells trouble for corporate America, as companies have continued to increase their debt levels despite the surge in yields. Two key concerns highlight the extent of the corporate struggle: companies have about $425 billion of dollar-denominated junk debt due to mature before the end of 2025, and market yields for speculative-grade bonds are now at least 3 percentage points higher than the average coupon the borrowers are paying on their existing debt. The higher borrowing costs faced by many companies could lead to decreased profits and an increased risk of default. Chief economic adviser at Allianz SE, Mohamed El-Erian, warned that this situation is likely to have an unexpected impact on the economy, possibly leading to a break in the financial markets that will spill back into the broader economy.

Even before the release of the jobs report, concerns about rising yields had led to a halt in new junk bond sales in the US. This marks the first “zero” week since August 18, according to data compiled by Bloomberg News. The 30-year US Treasury bond breached 5% this week for the first time since 2007, making it a challenging and expensive environment for issuers to manage their debt. The uncertainty and higher yields are making it harder to sell debt, as seen with banks like Barclays Plc experiencing tepid interest from loan buyers for a refinancing deal. The rapidly growing corporate private credit market is also expected to see a rise in defaults, with Bank of America Corp. estimating that it could reach 5% next year, surpassing defaults in the syndicated loan market. Until there is more clarity and stability in the market, companies planning to offer risky bonds and loans are likely to reconsider.

Credit markets are expected to remain under pressure in the near term, with higher borrowing costs and a reduction in issuance. The average yield on the Bloomberg Global High Yield index has reached 9.26%, the highest since November last year and nearly double the level at the beginning of this year. With the risk of needing to adjust their coupons higher, junk bond borrowers face a greater default risk. Experts suggest that the limited credit market conditions will likely continue into October, as higher yields and earnings blackouts discourage issuance. The combination of economic uncertainty and a rise in borrowing costs is causing credit markets to struggle, leading to a challenging environment for corporate borrowers and an overall negative impact on the economy.

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