December 18, 2023

It’s a bad time to need money.

Case in point: for the second year in a row, high-yield bond issuances are falling. In 2022, issuances fell by more than $280 billion, or 12% of the total market size. This year they’re set for another 10% decline.

Companies issued just $130 billion worth of high-yield bonds so far this year after issuing just $102 billion last year, two of the worst years since the 2007-09 recession, according to PitchBook LCD data. These types of bonds, also called “junk bonds,” are typically seen as risky because the underlying companies don’t possess balance sheets as strong as their “safer” investment-grade counterparts. That’s why they offer higher yields as compensation.

Perhaps these riskier companies have already borrowed what they need. Or maybe their financials are stronger and they don’t need to issue high-interest debt. Even if they’re managing debt better, the falling volume of junk bonds isn’t a positive development.

Some investors are happy with a 5% yield for U.S. Treasurys, considering how much safer they are than a high-yield bond offering just a few percentage points more. Thus, demand for new junk bonds is falling. Companies know this, but there’s not much they can do. Worse, some companies need cash and don’t have a choice.

Banks have tightened lending standards, which doesn’t help. During the second quarter, 51% of banks reported stricter lending standards. In the third quarter, 34% of banks tightened their standards even more.

The number of junk bonds coming due within the next three years is as large as it was in 2007, right before the Great Recession. Cash-strapped firms need a solution soon. If banks aren’t lending, more defaults and bankruptcies could be on the horizon. Unless lending standards ease, we’re on the verge of a credit market freeze.