The interest rate cut signal ignites the junk bond market! The yield on U.S. high-yield bonds falls to a 40-month low
The yield on the U.S. junk bond market fell to a 40-month low last Friday, with bond prices experiencing the largest single-day increase in nearly three months. Federal Reserve Chairman Jerome Powell signaled a potential interest rate cut, shifting market focus to a slowdown in the labor market. The yield on BB-rated high-yield bonds dropped to 5.80%, while the yield on CCC-rated bonds fell to 10.58%. The expectation of interest rate cuts reduces the default risk premium, driving funds into high-risk, high-yield areas. JP Morgan predicts that high-yield bond supply will be raised from $225 billion to $300 billion in 2025, indicating optimistic market financing demand
According to Zhitong Finance APP, the U.S. junk bond market experienced significant volatility last Friday, with yields falling to a 40-month low. At the same time, due to the sharp decline in yields, bond prices surged, marking the largest single-day increase in nearly three months. This trend is closely related to the latest statements from Federal Reserve Chairman Jerome Powell, who sent a clear signal of a "September rate cut" at the Jackson Hole annual meeting, shifting market focus from inflation risks to potential slowdowns in the labor market.
Figure 1
Multiple positive factors—robust corporate earnings, weakening labor data, and expectations of rate cuts—have collectively driven yields back to their lowest levels since April 2022, while bond prices achieved the largest single-day increase since May. As a result, sentiment in the corporate bond market has significantly improved, pushing yields across all levels of bonds downwards.
Figure 2
Specifically, the yield on BB-rated high-yield bonds closed at 5.80% that day, marking an 11-month low, down 0.36 percentage points from the previous trading day, with the single-day decline being the largest since May. More notably, the yield on the highest-risk CCC-rated bonds fell sharply by 20 basis points to 10.58%, marking the largest single-day decline since mid-June, while the 0.53% yield performance of this category of bonds last Friday also became the best single-day increase in over two months. Market analysts believe that the rekindled expectations of rate cuts have directly reduced the default risk premium, prompting funds to flow into high-risk, high-yield areas.
The primary market supply side is also releasing positive signals. JP Morgan's latest report points out that after a surge in issuance from June to August, benefiting from the current yield attractiveness, narrowing spreads, and expectations of loose monetary policy, the supply of high-yield bonds and leveraged loans in 2025 may continue to expand. The bank has raised its forecast for junk bond supply next year from $225 billion to $300 billion, while the scale of leveraged loans has been significantly increased from $600 billion to $985 billion, highlighting institutions' optimistic expectations for market financing demand
