Maturity Wall or Wall of Worry?

Young bull markets often come with a lot of yah-buts, and this one is no different. One we have heard a lot the past few months: Yah, the economy is holding up fine with high rates, but corporate bond markets face a giant maturity wall from 2025 onward, and having to refinance at higher rates will squeeze corporate cash flow and raise credit risk—with high-yield bonds facing the biggest headwinds. Like all theories, we can use markets to test this claim, and, well, we don’t think it passes.

While markets far-future events don’t materially sway stocks, and—breaking news—we are in 2023, 2025 is within the 3 – 30 month window stocks, bonds and other similarly liquid markets look toward. Therefore, if crushing refinancing needs in 2025 were a looming problem, we would likely see markets at least partly reflect it now. They wouldn’t wait to register the risk, especially such a widely watched one.

And, particularly, we would expect to see this in credit spreads—the premium investors charge for investment-grade and high-yield corporate bonds relative to 10-year US Treasurys, widely seen as the “risk-free” rate. A wider spread means investors are charging more for the added risk, implying they see those risks as greater. Narrower spreads, by contrast, mean lower perceived risk and therefore a lower premium.

So let us look at credit spreads since the end of 2021. As Exhibit 1 shows, they rose throughout 2022, with high-yield spreads enduring the greatest swings, largely mirroring the stock market’s moves. This makes sense, considering whatever concerns affected investors’ willingness to take stock market risk would naturally spill over to their willingness to lend to many of these same companies.

Yet high-yield spreads peaked in mid-July 2022, with their autumn spike not quite as high. Broader corporate spreads peaked that October, the day after the stock market’s bear market hit its low. Since then, high-yield spreads have mostly fallen, hitting year-to-date lows in December despite some temporary volatility along the way. Corporate spreads are flatter but still down on the year, too. This is the opposite of what we would expect to see if refinancing was a looming threat.

Exhibit 1: Corporate Credit Spreads Aren’t Flashing Red

Source: FactSet, as of 12/11/2023. ICE BofA US Corporate and High-Yield Index yields to maturity and Benchmark 10-year US Treasury Yield, 12/31/2021 – 12/8/2023.

It probably is fair to say that higher-for-longer rates contributed to high-yield bonds’ summertime swoon, which paralleled stocks’ correction on similar concerns. That is when chatter about the refinancing wall hit its apex. But this also tells us markets have seen these stories, heard fearful coverage, priced these concerns … and moved on, sending spreads below pre-correction levels.

As always, broad market aggregates aren’t representative of every company. Just as some S&P 500 constituents can have bad years or even bankruptcy during a stock bull market, it could well be that some individual companies face refinancing problems even as the vast majority skate through. But that isn’t unusual, and it isn’t some huge economic risk. Rather, it tends to be the market’s way of enforcing discipline and punishing bad business models, clearing room for more competitive firms to fill the void. It is a normal and healthy part of capital markets.

It also isn’t even a given that rates will still be so high in 2025 and beyond. Frankly, that is a big unknown. Maybe they will be. Or maybe waning inflation concerns keep Treasury yields tame. Maybe the Fed cuts rates a bit because it can. And it is also possible that we will have a recession and low rates come 2025 or 2026. We aren’t deeming this probable or even trying to estimate the likelihood, as we think doing so would be fruitless at this point (largely for the reasons documented by a former Bank of England economist in The Telegraph this week).^[i] But it is worth bearing in mind if only to really let it sink in that these refinancing wall claims depend on extrapolating high rates forward indefinitely. It is one possibility but far from the only one.

In the meantime, as ever, we suggest trusting the market. It is a wonderful sorting mechanism when it comes to long-running and widely circulated headlines like this. Stocks and bonds alike pre-price all widely known information, and this year that includes bond refinancing fears. Yet bond markets are signaling declining credit risk, suggesting the “maturity wall” is just one more brick in the wall of worry.