Credit markets have entered uncharted territory as the riskiest junk bonds send a warning to investors

By Christine Idzelis

An unusual dichotomy has emerged in credit markets

Investors on Wall Street are trying to determine if recent moves in the bond market are signaling complacency, with cracks appearing relatively contained for now.

Credit markets are sending unusually mixed messages to investors right now, and it's making some people nervous.

Spreads belonging to some of the riskiest corporate bonds have surged, while spreads for other, less-risky cohorts of the corporate credit market haven't seen nearly as much stress. One strategist at Manulife John Hancock Investments said the situation has left investors navigating "uncharted territory," as nobody has seen anything like this in recent memory.

This is the only time in the past 30 years that investors have seen spreads for so-called CCC-rated bonds - which sit near the bottom of the junk-bond ladder - widen so dramatically while the broader credit market has been more or less unperturbed, said Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments, in a phone interview Monday.

The CCC segment of the market is signaling "things are starting to get bad," Miskin said. But "the rest of the market is saying there is nothing wrong at all."

Is it complacency?

That raises an important question: Is the rest of the market complacent in the face of looming risks that could drive borrowing costs even higher than they already are?

Yields on 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30YTreasury notes and bonds recently touched their highest levels in decades. Yet corporate credit spreads, which measure the borrowing costs that companies pay on top of what the government pays, have been mostly stable, aside from a few pockets of stress.

Cracks tend to be quicker to form among the weakest borrowers with below investment-grade ratings, but fears tied to higher interest rates and concerns that some companies may be borrowing too much too quickly to fund the artificial-intelligence buildout risks spilling over to other areas.

As the chart below shows, spreads for CCCs have seen a sharp increase, while higher-quality junk bonds with BB and B ratings, as well as bonds with an investment-grade rating, haven't moved much at all.

"It's the biggest dichotomy we've seen between these lower-quality companies getting to distressed levels in credit, and the broader 'risk markets' priced nearly to perfection," said Miskin.

"CCC spreads have widened like this in every major liquidity event that we've had in the last 30 years," he said. Miskin pointed to events like the dot-com bubble of 2000 and the financial crisis of 2008.

"The question is, is the market right? That basically this time is different?" he said. "It's saying this is very idiosyncratic and not systematic."

To be sure, while neocloud company CoreWeave (CRWV) last week saw its stock and bonds sell off amid fears tied to its AI-related borrowing, some Wall Street analysts think investors may have been overly anxious about the rise in its cost of capital and the rate of return on its investments.

In the high-yield bond market, CCC spreads climbed on Friday to 12.97 percentage points over comparable Treasurys, according to data from FRED. By contrast, investment-grade bonds with BBB ratings had a relatively tight spread of 1.06 percentage points on Friday.

Recent fears over AI borrowing in the junk-bond market amid a blowout in CCC credit spreads may be a sign of indigestion rather than impending doom tied to AI, according to David Lebovitz, head of alternative-investment strategy at J.P. Morgan Asset Management.

"It's a growing pain," Lebovitz told MarketWatch on Monday on the sidelines of J.P. Morgan Asset Management's roundtable in New York on its 2027 long-term capital market assumptions. He sees AI as a long-term force in the market, with winners and losers naturally emerging in the meantime.

While CCC bonds have seen losses this year, it's a relatively small segment of the U.S. high-yield bond market. A J.P. Morgan credit-strategy report dated Oct 16 noted that the CCC bucket of the high-yield bond index has contracted to a record low 8.6%.

Exchange-traded funds that provide broad exposure to the U.S. high-yield bond market closed nearly flat on Monday, with the State Street SPDR Bloomberg High-Yield Bond ETF JNK slipping less than 0.1% as Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD05Y broadly rose. Bond yields and prices move in opposite directions.

So far this year, the State Street SPDR Bloomberg High-Yield Bond ETF has seen a modest loss of 0.2% on a total return basis through Monday, according to FactSet data.

Ken Jimenez contributed

-Christine Idzelis

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10-20-26 0829ET