Goldman warns high-yield bond supply surge pressuring markets

Investing.com -- Risk premiums in the US high-yield bond market reached their highest level in five months as a wave of corporate debt issuance overwhelms investors, Goldman Sachs Group Inc.'s head of credit strategy said Monday.

"The market's bracing for the same sort of episodic indigestion that we've seen in the investment grade market earlier in the summer," Amanda Lynam, Goldman's chief credit strategist, said on Bloomberg TV. "You're seeing that in high yield."

September issuance hit $38.51 billion, marking the busiest month this year for the high-yield market. Large junk bond offerings, including a $10 billion deal from SoftBank Group Corp., drove the surge. Paramount Skydance Corp. plans to borrow $44.4 billion through investment-grade and high-yield bonds this week.

The sales wave, combined with a full calendar of expected deals later this year and rising bond yields, is compressing corporate bond spreads, Lynam said. The extra yield investors demand to hold corporate junk notes over Treasuries widened 12 basis points to 294 basis points at Friday's close, the highest since April, according to Bloomberg index data.

Average spreads for CCC-rated notes, the lowest-quality tier, closed at 968 basis points, the highest since November 2023.

"At what level does higher rates volatility reduce the confidence of investors to deploy in corporate credit?" Lynam said. "That's been such a really strong tailwind in keeping spreads anchored. So that's what we're watching most closely."

Goldman has counted nearly $600 billion of supply related to artificial intelligence initiatives across debt markets this year. Only about 40% came from hyperscalers, showing the breadth of AI-related exposure, she said.

The Goldman team prefers BBB in investment-grade bonds, as most AI-related debt has come from AA and BB rated issuers.

"We're probably past the peak of supply in 2026 for the AI related theme because there's been a bit of indigestion and fatigue and I think 2027 will be the accelerator," Lynam said.

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