Investors panicked over stagflation, selling off high-risk bonds and hitting credit spreads at their widest in 14 months.

Concerns that a war in the Middle East could push the global economy into stagflation have driven investors to sell off high-risk bonds, causing the yield spread between CCC and BB bonds to widen to its largest level in over a decade.

June 11, 2569 at 06.30:XNUMX a.m. Bloomberg News reported that Global investors are increasingly concerned about the risk of stagflation, or economic slowdown coupled with high inflation, as a result of the prolonged conflict in the Middle East. These pressures are beginning to have a clear impact on companies with weak financial positions and high debt levels, which previously relied on low borrowing costs in the near-zero interest rate environment to raise large amounts of capital.

Data from the Bloomberg Index. specify that Investors are demanding a 6.4 percentage point spread on CCC-rated bonds, the highest risk bonds at the time of default, that are one notch below investment grade (BB-rated bonds). This is the largest spread in 14 months.

Many bond funds are also preparing for potentially increased risks in high-risk credit markets, including the private credit market, which is a hub for massive debt burdens from leveraged buyouts totaling over $2 trillion in recent years.

Following more than three months of conflict in Iran, soaring oil prices resulting from the closure of the Strait of Hormuz have added pressure on the global economy. Higher energy costs are fueling inflation and increasing the likelihood that central banks will keep interest rates high for an extended period. This puts companies with high debt levels at greater risk from rising financing costs and slowing economic growth.

Mitch Reznik, head of fixed income at Federated Hermes, which manages more than $9 billion in assets. said If the economy transitions from a period of low inflation to a period of high inflation, leading to stagflation, companies with high debt levels will face two simultaneous pressures: reduced operating cash flow and increased costs of capital.

The divergence between high-quality and low-quality companies is becoming more apparent in the U.S. credit market, with CC-rated loans yielding -8% this quarter, while BB-rated loans still yielded a positive 1.4%.

Holly Kim, co-founder of the hedge fund Glendon Capital. Warning that Regardless of whether the U.S. economy enters a recession or not, the markets are heading towards a default cycle due to the massive debt burden incurred during the acquisition bubble of 2564-2565. Stagflation is identified as the most significant threat to credit markets at this time.

Although the overall junk bond market continues to be supported by average yields of around 7% globally and has a shorter average maturity than government bonds, making it less affected by interest rate fluctuations, demand for low-quality debt instruments is steadily declining.

Goldman Sachs data. specify that The yield spread between B-rated and BB-rated bonds in the US market has widened to near its highest level since the 2551 global financial crisis, reflecting a “flight to quality” phenomenon—a shift of investment towards higher-quality assets—amid economic and geopolitical uncertainty.

Currently, the yield spread between CCC and BB-rated bonds globally has widened by more than five times, reaching its highest level in over a decade. This reflects the clear polarization in the credit market, where investors continue to have confidence in high-quality companies while avoiding those with a high risk of default.

David Forgash, Head of Leveraged Finance at Pimco. said The current high-yield bond market is clearly polarized, and some investors may be underestimating the risk, as the real risk lies within bonds offering very high yield spreads.

Pimco also warned that the rapid growth of the private credit market over the past decade has led to weakening of some lending standards, particularly for software companies which may be impacted by technological changes and AI.

Previously, UBS strategists estimated that the default rate in the $1.8 trillion private credit market could soar to 15% if AI significantly impacts the business models of many companies.

Analysts are also keeping an eye on companies that rely heavily on consumer spending, as these may be more severely impacted than other sectors by the economic slowdown. Federated Hermes recommends that investors increase their allocation to high-quality bonds and avoid companies with high debt levels, as current returns may not outweigh the risk of default.

Furthermore, experts believe Europe may face a greater risk of stagflation than the United States if the Strait of Hormuz remains closed for an extended period, particularly affecting the chemical, packaging, automotive parts, and real estate industries, which are already impacted by higher energy costs, tariffs, and competition from China.

refer : www.bloomberg.com

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