Bond yields have been rising again lately. That could create complications for low-rated companies that had just started to enjoy having easier access to credit.
As inflation showed signs of easing early this year, investors bet that the Federal Reserve might pivot quickly to slashing interest rates. That increased demand for bonds, driving down yields on new and existing corporate debt.
Speculative-grade companies such as
seized the moment. Altogether, these companies issued almost as many bonds in January and February as they did in the entire second half of 2022, when rising yields slowed borrowing to a trickle.
More recently, though, inflation data has come in hot and borrowing costs have climbed again. That could translate to another slowdown in bond sales—potentially good news for the Fed, which is trying to restrain economic activity as it fights inflation, but bad news for businesses that need to borrow to make ends meet.
The average speculative-grade corporate bond yield fell to a record low in 2021, jumped in 2022 and has been volatile this year.
Here are the junk-bond sales that occurred from January 2021 through the start of March 2023. Bubble size corresponds to the size of each deal. Yield is at issuance.
Ultralow yields fueled record borrowing in 2021. More than half of the roughly $460 billion in low-rated bonds issued was used primarily to refinance existing debt.
Borrowing dried up last year as the Fed started raising rates. For companies that did sell debt, costs rose.
Bond issuance accelerated earlier this year as borrowing costs fell. But the trend may be short-lived.
The record low yields of 2021 enabled companies to lock in low interest rates and push out bond maturities. A significant wall of maturities won’t arrive until 2025.
—Peter Santilli contributed to this article.
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