Distress signals: US junk bond spreads top 500 bps, a first since 2020

Spreads on US junk-rated corporate bonds, an important gauge of risk that signals higher defaults when it increases, surpassed 500 basis points for the first time since November 2020.

The figure, which measures the extra yield investors demand to hold the debt instead of US Treasuries, increased 31 basis points on Thursday to 508 basis points, according to the Bloomberg US Corporate High Yield index.

Junk spreads have surged 100 basis points the past two weeks as the Federal Reserve’s efforts to tame inflation fuel concerns that the central bank will push the economy into a recession.

Higher premiums make it more expensive to borrow for issuers that need funding the most — especially those with poor credit ratings due to weak cash flows or high debt loads compared to their earnings.
 

A recent bond sale from Carvana Co., for example, initially struggled to attract investors, and the used-car company ended up paying a whopping 10.25% yield. Drugmaker Mallinckrodt Plc. also found it tough to find buyers for debt funding its exit from bankruptcy earlier this year.

For most of the pandemic era, junk-rated companies across the globe paid little more to borrow than some of the biggest corporations — an average of just 2.4 percentage points more during 2021, a year that saw some of the easiest credit conditions ever, data showed.

Argentina hikes rates by 300 bps

Argentina's central bank raised its benchmark interest rate by the most in three years on Thursday, hot on the heels of a major hike by the US Federal Reserve and as the South American country firefights sky-high inflation running at over 60%.

The central bank upped the benchmark Leliq rate by 300 basis points to 52%, the sharpest rise since 2019, citing rising perception of financial risk, soaring global prices and the need to spur saving in the hard-hit local peso currency.