Yield-hungry investors are seemingly refusing to see rising risks that threaten to spill over from U.S. bankruptcy courts, Bloomberg News reported. Federal Reserve interest-rate hikes beginning last year have sent the cost of money shooting higher, and companies in 2023 have been buckling at the second-fastest rate since the financial crisis. Despite that, the average risk premium for U.S. high-yield debt has remained muted — averaging 420 basis points this year — suggesting investors don’t find junk-rated companies all that risky. So far this year, 175 large companies have filed for bankruptcy in the U.S. as of Oct. 21 — a roughly 63% increase compared to the average for that period since the turn of the century, data compiled by Bloomberg shows. At the end of September, default rates for U.S. speculative-grade corporates had risen to 4.9%, from just over 1% at the start of last year, according to Moody’s Investors Service. The option-adjusted spread for high-yield debt, however, peaked at little more than 516 basis points over Treasuries in March and has since fallen to 420 basis points as of Wednesday, Bloomberg-compiled data shows. That’s less than the average spread over the last decade of 426 basis points, generally a period of low borrowing costs and low defaults. The spread was higher in 2015 — peaking at 691 basis points — when big corporate collapses were relatively rare compared to now, at just 105 big bankruptcies in total.
