Goldman Sachs Group Inc. strategists revised higher their forecasts for debt defaults by U.S. junk bond issuers and leveraged-loan borrowers, citing widening credit spreads and pressures that U.S. tariff policies put on the world’s largest economy.
The default rate forecast for U.S. leveraged loan borrowers by the year-end was revised upward to 8 per cent from 3.5 per cent, according to an April 10 Goldman note from credit strategists led by Lotfi Karoui. They also raised the rate for U.S. junk bond issuers to 5 per cent from 3 per cent.
“A new headwind for credit returns has also emerged in the form of a positive correlation between rates and spreads,” they wrote. For borrowers rated CCC, “the economics of refinancing look bleak given the recent move wider in spreads.”
U.S. President Donald Trump’s ratcheting up of a trade war with China and upending of global commerce norms deepened selloffs in stocks and bonds Friday, underscoring how quickly investor relief from his 90-day pause in higher levies evaporated.
On April 3 — a day after Trump’s so-called “Liberation Day” — the extra yield investors demand to own the risky debt instead of Treasuries widened by the most since 2020. U.S. junk yield premiums topped 450 basis points this week, according to a Bloomberg index.
Given slower earnings growth and higher borrowing costs anticipated, the strategists also raised their estimate of dollar debt that may be downgraded from investment-grade status to junk. The so-called “fallen angels” volume is estimated to rise to US$75 billion, they said, up from the earlier forecast of US$40 billion.
Nearly a quarter of bonds rated BBB- are on outlook negative by at least one of the three major rating agencies, they noted.
“This is the highest level ever outside of the global financial crisis and the 2020 COVID shock,” they said.
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Finbarr Flynn, Bloomberg News
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