“Warning lights flash for US junk bonds”... CCC spreads surge 324 bps as 2028 maturity wall looms [fn Market Watch]

[Financial News] Funding conditions are diverging sharply by credit rating in the US high-yield (speculative-grade) bond market. In particular, credit spreads on CCC-rated bonds, among the lowest-rated, have widened by more than 300 bps since the end of April (1 bp = 0.01 percentage point), increasing refinancing pressures on low-rated companies. Warnings are emerging that companies’ funding risks could rise further if high interest rates persist, as high-yield bond maturities are set to come due in concentrated numbers from 2028.
According to iM Securities on the 8th, the option-adjusted spread (OAS) on US high-yield bonds rose from 2.61 percentage points at the end of August to above 3 percentage points at the end of September. The spread widened by 46 bps in about a month, its sharpest increase since military operations between the US and Iran at the end of February this year.
The option-adjusted spread is the additional yield investors demand over benchmark rates, such as US Treasury yields, after removing the effects of options embedded in a bond, such as early redemption. In general, a widening spread means the market views the bond as carrying greater credit risk. By contrast, spreads on investment-grade (IG) bonds widened by just 4 bps over the same period.
The divergence by credit rating within the high-yield market is even more pronounced. Since the end of April, spreads on BB-rated bonds have widened by 23 bps and those on B-rated bonds by 5 bps, while CCC spreads have surged by as much as 324 bps. CCC spreads are approaching 10 percentage points. The lower a company’s credit rating, the higher the interest rate it must pay to issue new bonds and refinance existing debt.
Lee Seung-jae, a researcher at iM Securities, analyzed that “this phenomenon is the result of the possibility of tightening by the US Federal Reserve System (Fed) coinciding with growing cost pressures on companies.” The explanation is that rising energy and raw-material prices are squeezing corporate profitability, while the possibility of higher interest rates is also being priced in, rapidly raising risk premiums on low-rated companies.
The problem is the maturity structure of high-yield bonds. While remaining maturities on investment-grade bonds are relatively evenly distributed, 88% of high-yield bonds mature within seven years. In particular, the share of short- and medium-term maturities has increased since the Fed’s tightening cycle began in 2022, creating a structure in which interest-rate changes could add to refinancing pressures.
The main test is expected to come in 2028. According to iM Securities, the volume of US high-yield bond maturities will increase sharply from 2028. The share of total maturities accounted for by CCC-rated bonds and lower-rated debt is also estimated to rise from a monthly average of 11.6% in 2027 to an average of 16.6% from January to October 2028.
However, assessments suggest that the weakness in CCC-rated bonds is unlikely to spread into an immediate crisis across the entire high-yield market. BB- and B-rated bonds make up 91% of the high-yield market, while CCC-rated bonds and lower-rated debt account for just 9%. As of the end of September, high-yield companies also recorded 19 credit-rating upgrades, outnumbering the 15 downgrades.
Lee Seung-jae, a researcher at iM Securities, said, “The sharp rise in spreads on CCC-rated bonds and lower-rated debt needs to be considered alongside the maturity composition and refinancing conditions within the high-yield market,” adding, “The possibility of spreads spreading to the high-yield market as a whole is limited for now, but the substantial increase in maturities from 2028 needs to be monitored.”
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