The spread of US corporate bonds with a junk rating, a significant risk indicator that indicates the risk of rising bankruptcy, exceeded 500 basis points for the first time since November 2020.
The size, which measures the extra return required by investors in relation to government securities, increased on Thursday by 31 basis points reaching 508, according to the US corporate high performance index of Bloomberg.
Overall, the spread has strengthened by 100 basis points in the last two weeks alone, amid the Fed’s aggressive moves to curb rapid inflation, which has heightened concerns that the Fed will push the economy into recession.
Higher yields make lending more expensive for companies with the highest financing needs, especially for those with low credit ratings due to weak cash flows or high loan-to-earnings ratios.
Indicatively, a recent sale of Carvana bonds found it difficult to attract investors and the used car company ended up giving a brutal yield of 10.25%.
Similarly, pharmaceutical company Mallinckrodt also found it difficult to find buyers to finance its exit from bankruptcy earlier this year.
Characteristically, for most of the pandemic era, companies with junk ratings around the world needed to pay slightly more than those with top ratings, averaging just 2.4% more in 2021 (240 basis points).
Source: Capital
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