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Rating Agencies Expect More Downgrades Among US Corporate Bonds

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Rating agencies reportedly expect a greater share of the lowest-quality investment-grade bonds to be downgraded than to be upgraded.

That’s the first time this has been the case in this part of the U.S. corporate bond market since the end of 2021, the Financial Times (FT) reported Monday (May 27).

The proportion of these bonds that is on “negative watch” is at 5.7%, while the percentage that is on “positive watch” is at 5.3%, according to the report.

In early January, those figures were at 2.9% and 7.9%, respectively, the report said.

The report attributes this shift together “negative watch” to challenges facing certain segments of the American economy as they deal with a combination of slower economic growth and high borrowing costs.

The number of big companies with a large amount of borrowing has also contributed to the change, according to the report.

The shift marks a reversal from last year, when there were far more bonds being upgraded from junk to investment grade than there were bonds moving in the opposite direction, the report said.

Last year’s trend was driven by the U.S. economy remaining strong despite fears of an oncoming recession, per the report.

This report comes at a time when new orders for manufactured durable goods increased by 0.7% in April, signaling a moderate improvement in business spending on equipment even as that investment continues to be constrained by higher borrowing costs, a strong dollar and weak global demand.

April’s increase in orders for durable goods followed a 0.8% increase in March and marked the third consecutive month of increases, the U.S. Census Bureau reported Friday (May 24).

Non-defense capital goods orders excluding aircraft — a category that is said to signal business spending plans — rose more than was expected by economists polled by Reuters.

At the same time, the high cost of essentials like food, rent and mortgages are weighing on many American consumers, Treasury Secretary Janet Yellen said Thursday (May 23).

Yellen said the price increases have been “substantial,” rapid and noticeable to consumers.

“The cost of living is a problem to a lot of people,” Yellen said. “So, I think this is a concern that people legitimately have.”