For professional clients only. The information contained within this post is not intended for retail clients.
16 October 2026
Two weeks ago, we argued that deteriorating public finances were not inherently bullish for long-dated government bonds, but that the responses they eventually provoked might be. The question was how long the economy could tolerate elevated borrowing costs while Washington continued to borrow heavily. Corporate credit offers an early test, although the headline looks more reassuring than the detail.
The ICE BofA US High Yield Index spread currently trades around 325 basis points. That hardly suggests a crisis. BB-rated bonds offer just 199 basis points over government debt, but for CCC and lower-rated borrowers the spread was 1,282 basis points: almost 13 percentage points above government yields. Their effective yield reached 17.6 per cent this week, compared with about 11.2 per cent at the end of January 2025. Since the end of August alone, it has risen by 280 basis points.
A secondary-market yield is not a refinancing offer. For distressed debt, it reflects doubts about repayment and recovery as well as the price of money. Nevertheless, it indicates how difficult replacing maturing debt could become. Few businesses can justify productive investment financed at anything approaching 18 per cent. Stronger borrowers retain access to affordable funding, while some weaker companies face costs that threaten their financial viability.
Existing fixed-rate debt provides temporary protection because higher market yields do not immediately alter the interest bill. The pressure arrives as debt matures and must be replaced. For a borrower carrying debt of five times annual operating earnings, a 5 per cent borrowing cost absorbs a quarter of those earnings. Refinance all that debt at 18 per cent and interest alone consumes 90 per cent, leaving little for tax or investment and almost no protection against falling earnings.
How quickly this bites depends on the maturity schedule. But businesses need not replace every bond tomorrow to reconsider spending today. A finance director anticipating expensive funding has reason to postpone expansion, conserve cash and restrain recruitment. A company need not lose market access before abandoning a project; its expected return need only fall below its financing cost.
One company’s curtailed expense is another company’s lost revenue. Cancelled investment reaches suppliers, while slower recruitment affects household spending. Individual efforts to protect balance sheets can collectively weaken demand. That is where government bonds and corporate debt can diverge: slower growth may pull government yields down while deteriorating earnings push credit spreads wider.
Inflation remains the complication. Persistent services inflation or another energy shock could delay relief even as activity weakens. Political pressure for cheaper borrowing cannot make lower yields sustainable; the more durable route runs through softer demand and easing price pressure, giving the Federal Reserve greater room to ease.
Washington also has financing choices. Issuing more short-dated bills could reduce the interest-rate risk private investors must absorb, while expanded buybacks support liquidity. Buybacks require funding, however, and neither measure removes the deficit. Falling investment, weaker tax receipts and corporate layoffs nevertheless increase the incentive to act.
The spread gap neither proves that distress will spread to stronger borrowers nor establishes that government borrowing caused the weakness. It does show why headline credit indices offer incomplete reassurance. Heavy public borrowing can keep government yields high, but it cannot ensure that private businesses keep investing at those rates. As expensive credit weakens demand and eases inflation pressure, the case for long-dated government bonds only strengthens.