U.S. Treasury Selloff Pressure Spreads to Junk-Rated Borrowers as Defaults Rise to $40.1 Billion This Year
nashnova research
The U.S. 10-year Treasury yield hit 4.82%, CCC-rated corporate spreads widened to 10.53 percentage points, and defaults reached $40.1 billion this year — high rates are squeezing the weakest corporate borrowers, splitting the credit market in two.
How badly are junk-rated borrowers being squeezed?
Spreads on CCC-and-below corporate debt widened to 10.53 percentage points, up from 8.08 a year ago. This means → the risk premium these weakest borrowers pay has jumped nearly 2.5 points in twelve months.
John Cocke, deputy CIO for credit at Corbin Capital, said there is "pervasive pessimism" at the lowest-rated tail of the credit market. Aggressive debt restructurings in recent years have further eroded investor confidence.
In plain terms = the worst-rated companies pay more to borrow, and fewer lenders are willing to lend.
How bad are the default numbers?
JPMorgan data show U.S. corporate default actions — including payment defaults and distressed exchanges — reached $40.1 billion this year, up 9% from the same period in 2025. The total is expected to rise further in 2027.
The trailing-12-month recovery rate — how much creditors get back after a default — fell to just 29%, well below the roughly 40% historical average over the past ~25 years. This means → when a company defaults, creditors lose more than they used to.
Dish DBS defaulted on $9.75 billion in June — the second-largest single default since the pandemic. Cable and satellite led all sectors in default volume.
Why is the credit market splitting in two?
In investment-grade debt, strong corporate earnings and resilient economic growth have kept demand firm and spreads relatively stable.
John Stopford, head of multi-asset income at Ninety One, described the U.S. credit market as "polarized": investment-grade bonds are "as expensive as they have ever been," while the junk market is "precarious."
In plain terms = strong companies have no trouble attracting capital; weak companies can barely get through the door — fire and ice in the same market.
How long will high rates last?
John Roque, head of technical analysis at 22V Research, warned: "Every time 10-year yields rise like this, something breaks" — and expects the rate trajectory to "persist for quite some time."
Futures pricing implies the Fed will raise rates two to three more times before the end of 2027, backed by AI-driven growth and inflation running persistently above its 2% target.
This reflects a market that has stopped betting on rate cuts any time soon — high rates are not a temporary phase but part of a new normal.
Which companies are most at risk?
Henry Song, portfolio manager at Diamond Hill Capital, put it bluntly: "Any company built in a zero-rate environment was simply not designed to withstand high rates for the long term. They are essentially hanging on."
Stopford warned that widening junk spreads could be "the canary in the coal mine" — a signal that a broader risk-asset selloff may follow.
This means → whether the high-yield market can avoid a systemic fracture through the Fed's continued tightening cycle is the central test for credit markets in the next phase.
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