A "flood of supply" of US high-yield bonds is coming! Goldman Sachs warns: risk premiums have risen to a five-month high, and investors are starting to "struggle to keep up."

Amanda Lynam, head of credit strategy at Goldman Sachs Group, Inc., said the surge in corporate bond supply in the U.S. high-yield bond market is starting to overwhelm bond investors and has pushed risk premiums to their highest level in five months. "The market is setting up for the kind of episodic indigestion we saw in the investment-grade bond market earlier this summer," Amanda Lynam said in an interview on Monday. "The same thing is now happening in the high-yield bond market." A series of large high-yield bond (junk bond) issuances, including a $10 billion bond from SoftBank Group, pushed September issuance to $38.51 billion as of last Friday, making September the busiest month this year for the high-yield bond market. Meanwhile, Paramount Skydance (PSKY.US) is seeking to issue a total of $44.4 billion in investment-grade and high-yield bonds this week. Amanda Lynam said that with bond yields rising and a large volume of bond issuance expected later this year, the recent wave of issuance is putting pressure on corporate bond spreads. Data showed that as of last Friday's close, the average extra yield investors demand to hold corporate junk bonds rather than U.S. Treasuries widened by 12 basis points to 294 basis points, the highest level since April. For bonds rated CCC, the lowest quality tier, the average spread ended at 968 basis points, the highest since November 2023. Elevated bond yields have made corporate bonds an attractive investment opportunity, especially favored by yield-oriented buyers. However, Goldman Sachs Group, Inc. is concerned that higher rates are starting to weigh on credit spreads. "At what point do higher rates and rising volatility start to erode investors' confidence in allocating to corporate credit assets?" Amanda Lynam said. "That has been a very strong tailwind keeping spreads stable. So that is precisely what we are watching most closely right now." People familiar with the matter said that BBB-rated bond spreads were widening on Monday as banks held conference calls with investors to discuss Paramount Skydance's plan to issue about $32 billion in investment-grade debt and the equivalent of $12.4 billion in junk bonds. According to Trace data, the spread on SpaceX's (SPCX.US) bonds issued in June with a 5.65% coupon maturing in 2033 widened by about 36 basis points to 177 basis points. The spread on Oracle Corporation's (ORCL.US) bonds with a 2.95% coupon maturing in 2030 widened by about 15 basis points to 160 basis points. Mark Clegg, a senior fixed-income trader at Allspring Global Investments, said that if the Paramount Skydance deal is well received by the market, it could restore market confidence and reopen the financing door for issuers that had been sitting on the sidelines. "The deal itself is not the problem, but its size is forcing investors to reassess spread risk across the entire market," Mark Clegg said. The average spread on U.S. high-grade bonds widened by 3 basis points to 80 basis points, the largest weakening since March. That level is already close to Goldman Sachs Group, Inc.'s third-quarter forecast of 85 basis points. Goldman Sachs Group, Inc. statistics show that so far this year, total bond supply related to artificial intelligence (AI) projects has approached $600 billion. "That number is truly extraordinary," Amanda Lynam said, adding that only about 40% of it is related to hyperscalers, highlighting just how broad AI-related exposure has become. The Goldman Sachs Group, Inc. team prefers BBB-rated bonds within investment-grade credit, because a large amount of AI-related debt comes from AA-rated and BB-rated issuers. "We may have already passed the peak of AI-theme-related bond supply for 2026, because the market has already shown some indigestion and fatigue, and I think 2027 will be an acceleration year," Amanda Lynam said.