More Bonds Are on the Verge of Being Downgraded to Junk: Credit Weekly

US Corporate Bond Market Faces Growing Risks

According to JPMorgan Chase & Co., while the US corporate bond market appears stable on the surface, there are increasing concerns about companies at risk of losing their investment-grade ratings.

The opening week of the year saw an unprecedented volume of US corporate bond sales, with risk premiums remaining subdued despite the surge in issuance. However, JPMorgan reports that the volume of bonds on the verge of being downgraded to junk status climbed sharply last year.

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JPMorgan’s analysis shows that approximately $63 billion in US high-grade corporate bonds are rated as high-yield by at least one agency, hold a BBB- rating from others, and have at least one negative outlook. This is a significant increase from $37 billion at the end of 2024.

Nathaniel Rosenbaum, a US high-grade credit strategist at JPMorgan, noted that as companies refinance, the burden of higher interest costs is mounting, which increases the risk of ratings downgrades for weaker issuers.

Despite these pressures, JPMorgan does not foresee immediate market instability. Investor appetite remains robust, and upcoming earnings are expected to be solid, likely keeping credit spreads within a narrow range.

Nonetheless, credit risks persist. In 2025, about $55 billion in US corporate bonds were downgraded from investment-grade to junk, far outpacing the $10 billion in upgrades to high-grade status. JPMorgan strategists expect this pattern to continue.

BBB- rated bonds now make up just 7.7% of JPMorgan’s US high-grade corporate index, the lowest proportion on record. Still, a considerable amount of debt is vulnerable to being downgraded to junk, which typically results in wider spreads due to the smaller pool of junk bond investors.

Several factors are contributing to increased credit risk: overall corporate debt levels are rising relative to earnings, driven by higher yields post-pandemic, significant investments in artificial intelligence, and ongoing mergers and acquisitions.

Zachary Griffiths, head of US investment grade and macro strategy at CreditSights Inc., commented that there are clear signs of weakening credit fundamentals beneath the surface.

Short-Term Outlook and Market Dynamics

In the near term, demand for corporate bonds remains strong. Fiscal stimulus from certain provisions of the One Big Beautiful Bill Act may also help support consumer confidence, according to Griffiths.

For several months, asset managers have shown little concern about credit risk. Investment-grade spreads have averaged 78 basis points this week and have not exceeded 85 basis points since June, well below the decade average of 116 basis points.

Looking ahead to 2026, JPMorgan anticipates a slowdown in credit rating upgrades, with acquisitions and increased leverage among AI-related issuers as key factors. Rosenbaum points out that top-tier technology companies may take on more debt and accept slightly lower ratings, as the penalty for moving from low AA to high A within investment-grade is minimal. Adjusting their capital structures could help them stay competitive amid the surge in AI financing.

However, some investors are becoming more cautious, reducing exposure to companies taking on excessive risk.

David Delvecchio, managing director and co-head of the US investment grade corporate bond team at PGIM Fixed Income, stated that they are steering clear of issuers stretching their balance sheets for major capital expenditures or mergers and acquisitions.

Listen to a podcast on ‘the Everything Bubble’ with Richard Bernstein Advisors for more insights.

Weekly Market Highlights

• Global bond issuance reached record levels as borrowers rushed to tap into strong investor demand, with many seeking to issue debt before earnings blackouts and a potential wave of AI-related sales.
• President Donald Trump has directed Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds, aiming to lower housing costs ahead of the November elections.
• Saks Global Enterprises is seeking up to $1 billion in loans to support operations amid a possible Chapter 11 bankruptcy filing.
• China Vanke Co. is working on a debt restructuring plan at the request of authorities, bringing the major real estate developer closer to default.
• First Brands Group Inc. warned it could run out of cash by the end of January without immediate funding, which may force the bankrupt auto-parts maker to close or sell parts of its business.
  • Founder Patrick James accused Jefferies Financial Group of withholding documents that could disprove fraud allegations.
  • A key financier is alleged to have orchestrated a kickback scheme with the founder’s brother, saddling the company with costly debt.
• Warner Bros. Discovery Inc. rejected a revised takeover bid from Paramount Skydance Corp., urging shareholders to stick with its existing deal with Netflix Inc. and expressing doubts about the rival offer’s feasibility.
• A $7 billion loan supporting Blackstone Inc. and TPG Inc.’s acquisition of Hologic Inc. was offered to investors, featuring a leverage ratio of seven times.
  • Additionally, $1.2 billion in leveraged loans were launched for the buyout of a Finastra Group Holdings Ltd. unit, and a $1.8 billion loan deal began for the acquisition of Hillenbrand Inc.
• Charter Communications Inc. issued $3 billion in junk bonds to refinance debt and repurchase shares. Six Flags Entertainment Corp. also sold $1 billion in high-yield bonds, with strong demand allowing for favorable pricing.
• Royal Bank of Canada and Deutsche Bank AG are marketing about $1.8 billion in debt to finance Investindustrial’s acquisition of TreeHouse Foods Inc.

Industry Moves

• Wells Fargo & Co. appointed Danny McCarthy to lead its credit franchise within the capital-markets division, bringing in an experienced industry leader.
• Yulia Alekseeva has been named head of fixed income at MissionSquare, an asset manager for public sector employees. She previously led consumer asset-based finance at Barings.
• Jean-Luc Lamarque, a veteran of the bond market, has departed Credit Agricole SA after nearly three decades at the bank.
• Ares Management Corp. has hired Gabriel Fong, formerly of CapitaLand Investment, as a partner for Asia credit, focusing on special situations.

Reporting assistance by Emily Graffeo.

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