The Bond Sell-Off Is Coming for Corporate America

Corporate America is feeling the bond sell-off as rising Treasury yields force companies to rethink their borrowing plans.

As U.S. Treasury yields rise, some companies are being forced to rethink how and when they borrow. If yields stay this high, investors say we might start seeing more defaults, the Financial Times reports.

The weakest borrowers pay the most

Borrowing costs for companies with the lowest credit ratings have hit their highest level since May 2020, just after the start of the COVID-19 pandemic. That is about 17%, a huge amount of money to pay to borrow cash.

The jump has been driven in part by the rise in Treasury yields, but investors are also demanding a bigger premium to hold riskier debt. The outlook for those companies in this rising rate environment is less good, and it was not necessarily built into their business models.

"These are zombie companies," FT reporter Kate Duguid said on the FT News Briefing. "These are the ones that existed pretty much solely on debt."

Companies pull back on issuance

Bank of America has suggested that companies are pulling back, or are expected to pull back, in October and not issue as much debt as had initially been anticipated. Some companies are waiting to see if they can wait out the jump in yields, while others are shopping different markets to get a better deal.

Default rates have not ticked up yet. While there is pain around borrowing, companies are not defaulting on that debt just yet. But if interest rates stay where they are, that level should rise at some point.

One twist on the wider economy: much of the corporate debt being issued right now is coming from companies building out AI projects, which changes how a credit squeeze would ripple through.

Yields at levels not seen since 2002

The 10-year Treasury yield recently hit 5.34%, and the 30-year hit 5.70%, both the highest since 2002. The 10-year posted its biggest quarterly rise this century in the three months to September, climbing nearly 90 basis points.

Dip buyers are stepping in, with the benchmark last around 5.32%, but there could still be scope for further moves. "Financial markets are in the midst of a discovery process to see where the new long-term anchor sits," said HSBC's chief Asia economist Fred Neumann.

Do you want to see how to make more plays? Do you want to find gains yourself?

Unusual Whales helps you find market opportunities through our market tide, historical options flow, GEX, and much, much more.

Create a free account here to start conquering the market with Unusual Whales

Options market and stocks to watch

Rising default risk in high-yield credit is a classic risk-off setup: watch for put buying in junk-bond ETFs and defensive rotation as the weakest borrowers face 17% funding costs. If issuance dries up in October as Bank of America expects, bank debt desks feel it too.

Stocks to watch include the high-yield credit ETFs HYG and JNK, where default fears show up first, plus investment-grade LQD if the sell-off spreads up the credit ladder. Leveraged-loan exposure sits in BKLN. On the banking side, BAC (Bank of America) is flagging the issuance pullback itself.

Want more market intelligence? Create your free Unusual Whales account for options flow, market tide, GEX, and the full toolkit.