Rising Credit Risks in the U.S. Corporate Bond Market

The U.S. corporate bond market is currently experiencing a significant shift, with a growing number of companies at risk of losing their investment-grade status. According to a report by JPMorgan Chase & Co., approximately $63 billion of U.S. corporate bonds are classified as high-yield by at least one rating agency, indicating a precarious financial position. This figure marks a substantial increase from $37 billion at the end of 2024. Nathaniel Rosenbaum, a U.S. high-grade credit strategist at JPMorgan, noted that the pressure on corporate balance sheets is intensifying due to rising interest expenses, which could further impact credit ratings.

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In 2025, around $55 billion of U.S. corporate bonds transitioned from investment-grade to junk status, a phenomenon referred to as "fallen angels." This figure starkly contrasts with only $10 billion of "rising stars," or companies upgraded to high-grade status. The current share of BBB- rated debt in JPMorgan's U.S. high-grade corporate index is at a record low of 7.7%, indicating a heightened vulnerability among companies that could be downgraded to junk status. Zachary Griffiths, head of U.S. investment grade and macro strategy at CreditSights Inc., expressed concerns about the increasing levels of indebtedness relative to earnings, exacerbated by rising yields post-pandemic and significant investments in artificial intelligence and acquisitions.

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Despite these risks, demand for corporate bonds remains robust. Investment-grade spreads have averaged 0.78 percentage points, remaining stable since June and significantly lower than the decade average of 116 basis points. Griffiths suggested that fiscal stimulus from provisions of the One Big Beautiful Bill Act could bolster consumer sentiment, contributing to the current market stability. However, some investors are becoming cautious, with David Delvecchio, managing director at PGIM Fixed Income, indicating a preference to avoid companies that are over-leveraging to finance capital expenditures or mergers and acquisitions.

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Looking ahead, JPMorgan anticipates a slowdown in credit rating upgrades for 2026, attributing this trend to increased leverage from AI-related issuers and ongoing acquisitions. Rosenbaum highlighted that high-quality tech companies might accept lower ratings to remain competitive in the rapidly evolving AI financing landscape. As the market navigates these complexities, the balance between strong demand and rising credit risks will be critical in shaping the future of the U.S. corporate bond market.

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• “As companies continue to refinance debt, the pressure on their balance sheets from rising interest expense is growing,” — Nathaniel Rosenbaum, U.S. High-Grade Credit Strategist, JPMorgan Chase & Co.

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• “If you look underneath the hood there are underlying signs of weakening in credit profiles,” — Zachary Griffiths, Head of U.S. Investment Grade and Macro Strategy, CreditSights Inc.

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• “We are avoiding issuers that may be stressing their balance sheets to fund significant capex plans or engage in M&A,” — David Delvecchio, Managing Director, PGIM Fixed Income.

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