Over $100 Billion in Investment-Grade Bond Spreads Fall Into Junk Territory
Claire Weston
Roughly $100 billion of investment-grade bonds now trade at spreads above the BB curve — Oracle and Stellantis lead the list as the credit cycle shifts late-stage and forced-selling risk builds.
Investment-grade spreads crossing into junk — what does that actually mean?
Bloomberg data show about $100 billion of bonds in dollar and euro investment-grade indices now carry spreads above the BB — i.e. junk-grade — curve.
This means → these bonds still wear an investment-grade label, but the market is pricing them as junk. The gap between the official rating and the market's view is widening.
In plain terms = the rating agencies haven't stamped "downgrade" yet, but buyers and sellers have already voted with their wallets and are treating these bonds as high-risk assets.
Oracle and Stellantis — why these two?
Oracle has been loading up on debt to fund a massive AI data-centre buildout, making it the poster child for AI-driven credit risk.
Stellantis is being squeezed by Chinese auto competition; its stock is the worst performer in Europe this year.
This reflects two distinct pressure lines converging on the same outcome: one is tech companies leveraging up for AI, the other is legacy manufacturers crushed by new competition — both end in spread blowouts.
Oracle's spread breached junk level in July but narrowed back below BB by early August. This means → market pricing can swing fast; a spread breach ≠ a guaranteed downgrade, but the alarm has already sounded once.
Why are "fallen angels" so destructive when they hit?
A fallen angel is a bond downgraded from investment grade to junk. Once the rating drops, funds restricted to investment-grade holdings must sell.
The high-yield market is far smaller than the investment-grade market, so there are fewer buyers to absorb the supply. This means → selling is concentrated; absorption is thin — prices can drop sharply in a short window.
In plain terms = imagine an entire apartment block told overnight that the building no longer meets code — everyone must move out, but the neighbourhood next door has nowhere near enough vacancies to take them in. The result is a stampede.
Beyond these two, who else is on the watchlist?
Business development companies (BDCs) and private-credit firms tied to the software sector have seen broad sell-offs on fears that AI could displace their borrowers — they are now closely watched as potential fallen angels.
The chemicals sector, battered for years by high energy costs and Chinese competition, is where Lombard Odier portfolio manager Ashton Parker sees opportunity emerging.
Parker also flags that "anything consumer-facing" should be under pressure. This reflects a stress pattern that runs well beyond one or two industries — it follows the chain of high costs + intense competition + weak consumption.
Market spreads vs. rating agencies — who calls the shot?
Market spreads typically move faster than rating agencies — a bond's spread can touch junk and then tighten again, while the rating never changes.
Fitch senior director Carla Taylor says Fitch focuses on revenue growth, margins, and cash-flow generation when assessing an issuer's ability to service debt, using a through-the-cycle, forward-looking framework.
In plain terms = the market is the mood thermometer; the rating agency is the medical report. The thermometer moves first, but the medical report decides whether you stay on the field.
What do past fallen-angel waves tell us?
In 2020, the pandemic triggered the largest downgrade wave on record; in 2022, the Russia-Ukraine conflict drove mass downgrades across European real estate.
The BofA ICE index of U.S. corporate bonds already downgraded to junk sits at its highest level since early 2024. Fitch's downgrade of Paramount Skydance to junk was a recent trigger.
Insight Investment's head of systematic fixed income, Paul Benson, says: "We are entering late-credit-cycle dynamics." This means → whether today's crop of potential fallen angels can repair their credit profiles before rating agencies act will be the key test for credit markets in the second half.
Content is for reference only, not financial advice.