More bonds teetering on the brink of junk

[NEW YORK] Beneath the calm surface of the US corporate bond market, there are worrying signs about companies that could lose their investment-grade status.

The first full week of the year has been one of the busiest for US corporate debt sales on record, and risk premiums stayed low even amid heavy issuance. But the amount of bonds teetering on the brink of junk surged last year, according to JPMorgan Chase. 

Around US$63 billion of US corporate bonds in the high-grade universe have a high-yield rating from one bond grader, a BBB- rating from others, and at least one negative outlook, according to the bank’s review based on ratings for debt in its high-grade US index. That figure was US$37 billion at the end of 2024, JPMorgan strategists wrote.

“As companies continue to refinance debt, the pressure on their balance sheets from rising interest expense is growing,” said Nathaniel Rosenbaum, a US high-grade credit strategist at JPMorgan. “That, in turn, does put a little bit more ratings pressure on weaker credits.”

JPMorgan doesn’t anticipate market turmoil anytime soon. Demand from investors is still strong, and earnings will probably be relatively strong in the coming weeks, leaving spreads relatively rangebound. 

But there are still risks in credit. About US$55 billion of US corporate bonds migrated from investment-grade to junk status in 2025, becoming “fallen angels,” according to JPMorgan. That far exceeds last year’s US$10 billion of “rising stars,” or firms elevated to high-grade. And the trend is set to continue, the strategists say.

BBB- debt is just 7.7 per cent of JPMorgan’s US high-grade corporate index, a record low share. But a relatively high amount of debt is susceptible to being cut to junk. Companies typically see their spreads blow out when they lose their high-grade status, as the universe of junk bond investors is much smaller in dollar terms than investment-grade.

There are reasons to be a little more concerned about credit risk now: Broad measures of indebtedness have been creeping higher relative to earnings, fuelled by rising yields after the pandemic, a flood of spending on artificial intelligence, and acquisitions.

“If you look underneath the hood there are underlying signs of weakening in credit profiles,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights.  

But in the near term, demand for bonds has been strong. And fiscal stimulus from some provisions of the One Big Beautiful Bill Act could help keep consumer sentiment “a little more buoyant,” Griffiths said.  

Generally, money manager have been less worried about credit risk for months. Investment-grade spreads have spent much of this week averaging 0.78 percentage point, or 78 basis points, and haven’t risen above 85 basis points since June, according to Bloomberg index data. The mean for the last decade is closer to 116 basis points.  

For 2026, JPMorgan expects a slowdown in credit ratings upgrades, and cites acquisitions and re-leveraging from AI issuers as key drivers. The highest quality tech issuers could add leverage and accept ratings that are a notch lower, points out Rosenbaum, as there isn’t much spread penalty within investment-grade when going from low AA to high A, for instance. Changing their capital structure could help make them more competitive in the AI financing deluge, he said. 

Still, some investors are looking to cut their exposure to companies that are piling on risk. 

“We are avoiding issuers that may be stressing their balance sheets to fund significant capex plans or engage in M&A,” said David Delvecchio, managing director and co-head of the US investment grade corporate bond team at PGIM Fixed Income, which oversees US$906 billion as of September. BLOOMBERG