CCC Debt Turns Distressed for First Time Since 2023 Bank Crisis Josie Reich The spread on the riskiest US corporate bonds has jumped above 1,000 basis points over Treasuries for the first time since the regional banking crisis in 2023. That level of risk premium typically implies high probability of default, restructuring or loss. Debt that is rated CCC — the lowest tier of junk — traded at a spread of 1,007 basis points on Wednesday, up from 860 basis points at the start of September.
That’s the widest since March 2023, when investors dumped risky credit as a regional banking crisis took down Silicon Valley Bank and Credit Suisse. “The key driver is the economy is doing well but not necessarily going gangbusters,” said Collin Martin, head of fixed income research and strategy at Charles Schwab Corp. “Triple C rated issuers are the riskiest issuers out there, and they tend to be the most sensitive to changing interest rates.” CCC spreads have risen steadily since April as investors began anticipating the Federal Reserve’s pivot to tighten policy in a bid to tame inflation. Soaring global yields pressure highly levered borrowers by boosting debt service costs and making it harder to refinance, just as a large chunk of bonds and loans comes due. In addition, lower-rated companies tend to be smaller and therefore more exposed than bigger firms to the impact of inflation, particularly in energy prices.
If they can’t pass that on to consumers, profits get squeezed. “Historically, when the Fed hikes into higher energy prices bad things happen to the economy,” said Jack Mc Intyre, global bond and fixed income portfolio manager at Franklin Templeton Inc. Not all CCC debt is suffering, though the distressed portion is weighing on that entire ratings bucket, according to Barclays Plc. More than half of the worst-performing CCCs are in the technology, media and telecommunications sectors, with cable and satellite companies the biggest laggards. “When we look at Triple Cs today, dispersion is very, very high,” said Corry Short, a strategist at Barclays, referring to a widening difference in performance by bond, company and sector. CCC rated companies make up about 8.5% of the US high-yield index, down from 9.7% a year ago.
Spreads in higher-rated bonds have held relatively steady despite soaring global yields and slumping equities. “Even if there continues to be pain there, it doesn’t necessarily need to have a ripple effect to all high-yield bond investments,” Martin said, referring to CCCs.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing