Neuberger Berman on the Lookout for Cracks in Credit Markets

Introduction

The Canary in the Coal Mine

According to Knutzen, the high-yield bond market, also known as the junk bond market, has the potential to act as the “canary in the coal mine” for market volatility. As a visible threat, it is likely to reflect any impending risks earlier than other asset classes. Despite the Bloomberg U.S. High Yield Bond Index delivering a strong return of 6.4% by the end of August, Knutzen believes that this market segment may be susceptible to risks associated with expensive refinancings due to a looming high-yield maturity wall.

Concerns About Expensive Refinancings

Knutzen expresses worry about the pricing of future policy rate cuts and how it may push the high-yield maturity wall further into the future. With the 10-year Treasury yield reaching a multidecade high of almost 4.4% in August, many major U.S. corporations are now cautious about borrowing beyond 10 years. As we approach next year, approximately $700 billion worth of high-yield bonds are set to mature by the end of 2027. This poses a challenge, especially for companies with credit ratings below the top BB ratings bracket.

Conclusion

Neuberger Berman acknowledges the importance of monitoring the credit markets amid the Federal Reserve’s rate-hiking campaign. Knutzen’s concern primarily lies in the high-yield bond market and its potential to signal broader market volatility. As the high-yield maturity wall approaches, expensive refinancings become a growing threat. While the current economic climate appears stable, Neuberger Berman recognizes the need for vigilance and careful evaluation of market conditions to proactively navigate potential risks.

Junk Bond ETFs Continue to Perform Well

Rising Risks in the Junk Bond Market

Hope for Rate Cuts from the Federal Reserve

Neuberger Berman Prefers Defensive Approach