Opinion · Hometown Post
By Christine Idzelis An ETF tracking the U.S. high-yield bond market's year-to-date decline now matches that of an ETF investment grade bonds, despite having a higher yield CoreWeave's corporate bonds and shares fell sharply in Wednesday. Signs of stress in the high-yield "junk" bond market are rising, with recent borrowing tied to artificial intelligence falling under increased scrutiny. After a recent surge in corporate bonds linked to the AI build-out, investors are keeping an eye on high-yield borrowers like AI cloud company CoreWeave (CRWV), which in April was able to increase the size of its bond offering.
The company's bonds have seen a steep selloff since then, and the cost of protecting CoreWeave's debt against default has been rising this month. CoreWeave is a "bellwether for AI sentiment," Craig Manchuck, a portfolio manager for bonds at Osterweis Capital Management, said in a phone interview. The selloff in its bonds is "shaking the market a bit today," sparking worry the company may have borrowed too much too fast and risks running out of runway to raise more capital to fund its AI ambitions, he said.
The $2.75 billion of 9.75% bonds issued by CoreWeave in April were trading at 81 cents on the dollar earlier Wednesday to yield more than 15%, according to data provided by BondCliQ. Shares of CoreWeave also got hit, plunging 15.5% on Wednesday. Traders in junk bonds tend to "sniff out problems well in advance of the equity market," Stephanie Link, chief investment strategist and head of investment solutions at Hightower Advisors, told MarketWatch.
Cracks have been mostly "contained" to the most vulnerable borrowers within the junk-bond universe, she said, but added: "I'm certainly watching it." Companies have been turning to the bond market to fund the AI boom, including both investment-grade and high-yield borrowers. Rising Treasury yields have contributed to fears that more signs of credit-market stress might emerge. Bonds with ratings deep in junk territory at the CCC level - a low rung of junk - recently have sold off sharply.
Worries over weaker borrowers are reflected in the "spread," or extra compensation investors earn on CCC bonds relative to the prevailing Treasury rate. It jumped to 12.67 percentage points above Treasurys on Tuesday, from 9.04 percentage points in early May, according to data available via FRED. Bonds with higher junk-bond credit ratings have seen more modest spread moves over the same period.
That's reflected in the average spread for the broader U.S. high-yield debt index, which, at an average 3.16 percentage points on Tuesday, was far less than for CCC-rated bonds. Junk bonds are riskier to own than investment-grade debt because the companies that issue them tend to have heavier debt loads relative to cash flows. That generally makes the potential for default a higher risk.
The cost of protecting CoreWeave's debt against default for five years has increased to almost 881 basis points on Monday, up from around 547 basis points at the end of June, according to Dow Jones Market Data. That's based on credit-default swaps, which are derivative contracts that investors buy to hedge against against default risk. They become expensive when borrowers are perceived to be at increased risk of defaulting.
"We are confident in our backlog which more than supports all of our debt obligations," CoreWeave said in an emailed statement shared by a spokesperson. "We are confident in our funding." The company's credit rating falls within the B category based on S&P Global Ratings, according to BondCliQ. That's above the CCC level, but still below investment grade.
"They're rated higher but they're trading more like triple-C," said Brian Therien, senior fixed-income analyst at Edward Jones, by phone. The bond market has been volatile lately, as yields on safer Treasurys have jumped, sending bond prices lower. And investors anticipate that the Federal Reserve, after lifting its benchmark rate in September for the first time since 2023, could hike interest rates further by year's end to tamp down on inflation in what appears to be a resilient economy.
The 10-year Treasury yield BX:TMUBMUSD10Y was trading around 5.19% on Wednesday afternoon, following a hotter-than-expected inflation reading from the consumer price index. The effective yield on U.S. junk bonds was about 8.13% on Tuesday, according to data on the website of the Federal Reserve Bank of St. Louis.
"A lot of these companies are borrowing relatively short, but you can't refinance it at 15%," said David Royal, chief financial and investment officer at Thrivent. "That's how problems start." While the jump in yields has left the 10-year Treasury bond looking more attractive, Tim Holland, chief investment officer at Orion Advisor Solutions, said by phone that he's concerned high-yield bonds still aren't offering investors adequate compensation for the risk they're taking on. "We're still a little cautious on high yield because even though the absolute level of yields are great, spreads relative to traditional are still pretty tight," he said.
"You're not getting compensated in the classic sense for going out on the risk spectrum." High-yield bonds were broadly declining Wednesday, enough to match the broader U.S. investment-grade fixed-income market so far this year, after previously outperforming against the backdrop of a still-solid economy. While junk bonds are generally riskier, their higher yields can provide some extra cushion when debt prices are falling. On Wednesday, the State Street SPDR Bloomberg High Yield Bond ETF JNK closed Wednesday at an 18-month low, and has lost 5.1% in 2026, to roughly match the decline in the iShares Core U.S.
Aggregate Bond ETF AGG, which tracks the investment-grade market. The JNK ETF has a dividend yield of 6.86% as of Wednesday's close, according to FactSet data, while the AGG ETF's yield was 4.18%. Joy Wiltermuth contributed. -Christine Idzelis This content was created by MarketWatch, which is operated by Dow Jones & Co.
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