(Bloomberg) — A surge of corporate bond supply in the US high-yield market is starting to overwhelm debt investors, pushing risk premiums to the highest level in five months, according to Goldman Sachs Group Inc.’s head of credit strategy.
“The market’s bracing for the same sort of episodic indigestion that we’ve seen in the investment grade market earlier in the summer,” Goldman’s chief credit strategist Amanda Lynam said on Bloomberg TV Monday. “You’re seeing that in high yield.”
A string of chunky junk bond offerings — including a $10 billion deal from SoftBank Group Corp. — had pushed September issuance to $38.51 billion as of Friday, making it the busiest month this year for the high-yield market. Meanwhile, Paramount Skydance Corp. is looking to borrow $44.4 billion of investment-grade and high-yield bonds this week.
The sales spree and a robust calendar of deals expected to come later this year alongside rising bond yields, are putting pressure on corporate bond spreads, said Lynam. The extra yield investors demand on average to hold corporate junk notes over Treasuries widened 12 basis points to 294 basis points at Friday’s close, the highest since April, according to Bloomberg index data.
Average spreads for notes rated in the CCC bucket, the lowest-quality tier, closed at 968 basis points, the highest since November 2023.
Higher bond-yields have made corporate bonds an attractive investment opportunity especially for yield-focused buyers. The risk for Goldman is the higher rates start weighing on credit spreads.
“At what level does higher rates volatility reduce the confidence of investors to deploy in corporate credit?” said Lynam. “That’s been such a really strong tailwind in keeping spreads anchored. So that’s what we’re watching most closely.”
Bond spreads in the BBB tier are widening on Monday as banks are holding investor calls to discuss the sale of about $32 billion of investment-grade debt and $12.4 billion-equivalent of junk bonds for Paramount, according to people familiar with the matter.
Spread on SpaceX’s 5.65% notes maturing in 2033, which were issued in June, widened by about 36 basis points to 177 basis points, according to Trace. Oracle Corp.’s 2.95% bonds due in 2030 have widened by about 15 basis points to 160.
If the Paramount deal is well received, it could restore confidence and reopen the door for issuers that have been sitting on the sidelines, said Mark Clegg, senior fixed-income trader at Allspring Global Investments.
“The deal itself isn’t the problem, but its size is forcing investors to reprice spread risk across the market,” said Clegg.
Average US high-grade bond spreads widened 3 basis points to 80 basis points, weakening by the most since March. That’s close to 85 basis points that Goldman’s forecasting for the third quarter.
Goldman has tallied nearly $600 billion of supply related to artificial intelligence initiatives across debt markets so far this year, “which is just an extraordinary number,” Lynam said. Only about 40% of that has been related to hyperscalers, highlighting just how broad the amount of AI related exposure is, she added.
The Goldman team prefers BBB in investment-grade bonds as a huge chunk of AI-related debt has come from AA and BB rated issuers.
“We’re probably past the peak of supply in 2026 for the AI related theme because there’s been a bit of indigestion and fatigue and I think 2027 will be the accelerator,” Lynam said.
–With assistance from James Crombie and Gowri Gurumurthy.
(Updates with Paramount details starting in eighth paragraph)
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