US Junk Bonds Post Worst Losses in Six Months, Spreads Widen
bloomberg.com
bloomberg.com
Quite hard to diversify away though because that means missing out on AI boom and if the US shits the bed then chance are everything else gets sucked down with it
Is there an argument that other economies would recover better than the US, in the long term? But at that point, one could just diversify during/after the crash.
I diversified away from the US to international equities VTI -> VSUX starting at the beginning of the year. My thesis is that trade is rearranging due to US trade policy. If you look at the S&P500, growth has been flat since 2022 for anything that isn't Big Tech AI bubble. Therefore, I believe that between go forward US economic policy and global trade reconfiguration, non US will outperform the US over the next five years.
With that said, the biggest US companies are pretty exposed internationally already. I'm not sure someone needs to or it would be prudent to say dump VOO and move to VXUS 100%.
It's the reverse for EU investors, where you have to now accept pretty big currency risks to ride the A.I train (If you add in the EUR/USD rally I think you're flat to negative on your SP500 as an EU investor for example).
My question in the second paragraph was definitely not rhetorical. :)
YTD, US equities have underperformed most other equity indexes.
The argument is that a weakened dollar, political / economic unpredictability, politicization of the fed, and big spending bills are starting to weigh on investors’ minds.
Personally, I don’t think a dramatic “crash” is the most likely outcome. I think it would look more like a slow erosion of US growth and dominance compared with other economies.
https://www.bloomberg.com/news/articles/2025-10-11/a-great-y...
Your comment lines up with my sentiment, though I don't put a ton of stock (pun somewhat intended) in mine due to "amateur" status.
But I guess the "if not US, where?" question remains for me. Diversity "everywhere", try to be smartly selective?
So telling you what I hold: I’m long the market, mostly in US equities (60%), developed economy international equities 20%), and intermediate term US bonds (20%).
My investment horizon is 20+ years, so in general, I don’t pay attention to the short term vol.
I have cash I need to invest. I'm not looking to change any of my existing investments, so it's more a question of what the right move is there, with the wrinkle that I now live in the EU (again) after spending my whole adult life in the USA.
I don't believe (or have interest) in making any short term moves. I don't think I need to (and feel very fortunate).
We have the same 20+ horizon, but I guess the crux of the issue (and the point of my initial entry into this thread) is: how different do I think the world will be in 20+ years, and even if I'm confident it'll change, do I know what it'll become to make the right moves now?
I don't think I do (and I'm somewhat skeptic anyone else really does either).
There's lots of crashes, but they're over-predicted. A quote I can't remember perfectly, "we predicted 10 of the last 3 stock market crashes".
That said, if the levers of power in the USA stop being independent, if they all become bound to the will of the President, there's a strong risk of someone — could be the President who ends their independence, could be a successor — crashing it all very hard. If whoever is in charge at the time hates intellectuals, I mean it can be Pol Pot hard; but even if the leader at that point tries to do it all right and listens to sane advisors, it can still crash as hard as the Chinese famine resulting from the Four Pests campaign.
The USA isn't there yet. That's the direction of motion, but even with the current speed of change, there's enough independence that it's not even close to that bad yet.
I hope we never get there.
Take a look at Dubai, for instance.
And at least arguably, the causality goes the other way: restless populations in poorer nations are more likely to drive democratic reforms, where wealthy folks tend not to rock the boat.
Except they've been saying that for the last 2-3 years.
I have lunch with a friend every 2-3 weeks, and he self-manages his retirement, and he's retired. It was ~2.5 years ago that he said "A lot of the financial news guys I follow say there's going to be a crash in the next 3-6 months."
At every lunch we've been following up on that, and it just hasn't crashed yet.
I'm not saying it won't, I'm not saying it's risky, but just getting out of the market is not an ideal solution either.
Simple example but real. Parmesan cheese. It was just a staple for me, I'd use it like water, now I literally think twice when making pasta because it's so cost prohibitive to use.
So your friends finances may not have "crashed" but he will be much much worse off then he retires and I doubt his wealth has really gained much of anything in the last few years either.
He has probably gained around 5x in the last 2-3 years. He is heavily into bitcoin. I've gained 3x in the last 2 years and 4x in the last 3 years largely in the stock market.
Not saying you're wrong. In Colorado USA the middle class income range is $62-186K, which is a pretty huge range.
I guess you’re “making more money”, but you’re going to be paying a lot more for everything too?
I tend to agree a big crash is in the cards, but as they say, the market can be irrational for a very long time. The "irrational exhuberance" speech was in 1996 but the market rallied hard for many years after that until the eventual inevitable crash. If you sold in 1996 you messed up real bad.
Avoiding it seems wise.
In general, the thing to look at is the level of liquidity in the market. The liquidity is there, but the problem is there's too much uncertainty for many companies to be able/willing to invest, so it mimics a lack of liquidity.
Cash is worse than even the worst observed scenarios of stock market investing.
E.g., cash is worse than if you had bought your whole portfolio with the worst timing possible like right before the 2008 crash.
I calculated this out comparing typical savings account APY with S&P 500 and the break even recovery of the S&P account is 2013, with annualized returns at 7.4% for your investments versus 2% APY for cash. That means your cash account is less than half the size of your investment account by 2024. And this is the worst case scenario with a massive market crash and the entire portfolio purchased at the exact wrong time - very unlikely, most people invest continually over time.
The only purpose of cash is for immediate liquidity.
People who invest in the stock market expect large fluctuations including major market crashes. That risk is baked in to the expectation of long-term reward.
If you need to stabilize your portfolio to prepare to withdraw from it soon and preserve its value, talk to a professional if you don’t know what you’re doing. They probably won’t recommend 100% cash deposits unless you’re literally spending it all this year.
Gold is interesting because it was a hedge for a long time, but with the recent run up I wonder if it's entering meme territory. Now that it's moving, people are jumping into it.
It would be difficult to lose money on Manhattan or coastal Californian property as well.
Generally, ‘this asset is at a record high’ is not a reason to get into it.
Alas can't - employer prohibits any use of derivatives.
Plus my last adventure down that lane didn't go great. (Some big wins, some big losses and a realisation that I better leave things I don't fully understand alone - like the options greeks).
What kind of employer is that?
Employers often block you from trading derivatives of the company you work for, but how could they have any say on other stocks?
But yeah. I looked at how my pension funds are invested, and it's like 70% in the US. Even more than the sovereign wealth fund, which is apparently around 50% (if a quick AI search can be trusted).
Thing is, I'm not sure I will like the world where OpenAI and co. are as wildly successful as their valuation suggests either. So maybe I should invest in them, so that if it comes to pass, I at least have money?
Many corporations are listed in the US even if they do a lot/most/all of their business overseas. Heck, there are Chinese companies that sell nothing in the USA listed on the US stock exchanges like XPENG.
I bet 20 GBP that Brexit would happen for that reason. Ended up with around 100 GBP to drown my sorrows :(
I think their current valuation isn't suggestive of a world that's going to change very much.
If investors were taking seriously the idea that this could be "it" with AI enabling even full automation — not superhuman AI, not even a fast learner, just AI that can fully automate everything we've currently got and not be limited to the subset of desk jobs that LLMs can do OK — it would allow the economy to double in size in whatever wall-clock time period it takes for the AI to gather enough training data by simply observing human workers doing the things the AI has not yet learned to do.
If self-driving cars are a good example in this regard, that observation time may quite large:
Current AI has not yet mastered full self-driving of cars in general conditions, despite all the cameras on cars gathering data about how all the other (human-driven) cars around them behave in real conditions. To take a somewhat arbitrary cut-off points for the sake of illustration, going from the 2007 DARPA Grand Challenge to today in self-driving cars, would suggest a growth of 3.9%/year.
Global GDP growth of 3.9%/year would be worth a much higher valuation than the AI companies are getting, and yet still be slow change.
This assumes that the economy and the governments will happily suffer the electricity and financial demands that Sam and co would give and the world would accept. Even if Sam's words were true, it is still a leap of faith because there is no data backing those words.
My take in late 2023 was that GPT-5 would either further push transformers into the "there is still a real chance transformers might be IT" or will become the unquestionable sign that transformers have peaked as a general technology. My take in 2024 was that the AI bubble was going to be noticed. My take in 2025 is that AI companies (other than the big ones like OpenAI) are going to struggle getting funding.
Most economic growth since electricity became economically relevant assumes that, the only thing that changes are the names of who (supplies and) demands the energy.
> Even if Sam's words were true, it is still a leap of faith because there is no data backing those words.
Ignore Sam's, assume mine in the hypotheticals of my comment: even something slower than Musk's ongoing failure to make FSD is still a massive increase over the status quo that justifies the price, yet it can do so in a way that's still not going to feel like a radical shift to live through.
> My take in 2025 is that AI companies (other than the big ones like OpenAI) are going to struggle getting funding.
Mine is that there's definitely a bubble overall, but not necessarily in any single player: who wins the pop and who disappears is unclear, but whoever does survive can easily reduce spending when there's no competition and they're consequently not having to put 1/3rd of their compute budget into the next marginal improvement needed to beat whoever else just beat them.
I am inclined to agree but Waymo seems to provide a counterpoint? Is this because they have a good system for keeping human managers in the loop?
If I had to put money on who gets fully-general first, I'd put it on Waymo; but I have no idea what anyone in China is doing so there's plenty of room for surprises.
That would nuke the economy, as it currently exists. What's any modern American business following McKinsey "best practices" going to do to the people whose jobs it can automate? It'll fire them all, ASAP (except maybe one or two left to do supervision and monitoring, if it's not totally brain dead). Then the entire mass-consumer-driven economy would collapse and wither, due to mass unemployment.
But the stock would go up this quarter, so it's a win that must be pursued.
That would happen even with UBI, because it's not like they'd replace your salary with free money. You'd have to shrink your lifestyle to live like the bottom quintile. You'd get just enough so you'd not be desperate enough to topple the system that no longer values you, and not a penny more.
And I think none of that's going to stop anyone. If AI gets to the point you described, our current economy will be destroyed, most people will be left behind, and the economy will reorient into a weird thing chiefly concerned with satisfying the whims of the riches billionaires.
I also said "not even a fast learner".
If everything is just automated, all immediately at once and the AI is forever able to just do all possible labour, rather than as I suggested a case where it takes the AI as long to gather sufficient training data from watching humans as self-driving cars are taking to do that, that nukes the (human relevance to the) economy.
But that's not the scenario I gave there.
This scenario I gave is one in which humans do still have a comparative advantage: we learn faster, so we can get working on new jobs and make a decent amount in each of them before any given AI has time to master the skills needed for that job's tasks by watching us.
(That said, and I didn't think of this with the previous comment, there's also a whole bunch of questions that start with "yes, but how much does it cost?" and then dive into a huge level of detail).
> You'd have to shrink your lifestyle to live like the bottom quintile.
Way ahead of you :P
Actually, while bottom quintile would be an increase for me (though an unnecessary one as I'm fine because I don't care about the materialist lifestyle), keeping even that would rely on my tenant still being able to pay me rent, so in any realistic scenario I'd still have problems.
> and the economy will reorient into a weird thing chiefly concerned with satisfying the whims of the riches billionaires.
It will definitely be weird, but I suspect most or all the current big winners are likely to be very unsatisfied. Outside Context Problem.
That's pretty terrible outcome too. So what if you learn faster, if your "career" will only last 5-10 years and you have to start over. It would be a profoundly unstable and anti-human lifestyle.
> It will definitely be weird, but I suspect most or all the current big winners are likely to be very unsatisfied. Outside Context Problem.
That's probably true (say, the Waltons will be a lot poorer), but I think the end state remains the same. Maybe it's just Bezos, Musk, Altman, and two dudes TBD harnessing all the word's resources to build ziggurats to memorialize their own power. They key point is all the wealth will be focused in a very few individuals, with no economic need to spread the wealth around. It doesn't really matter if those individuals are an old or new set.
That's already an (on average) improvement over software, where half the stuff we learn becomes obsolete every 2 years.
But also, the anchor I'm using to guess the period here is 18 years, so you'd only have to do this twice between graduation and state pension age.
I find it easier to live with lower/no gains than in constant FOMO
It's either that, or I try to compete with professionals, that have tools I do not have, info I do not have, algos that I do not have, and the ability to cheat the market with dark pools, which I do not have.
There's a little restructuring going on, so it' bound to be a bit bumpy which would make some folks nervous, but you have nothing to fear. The end result will be a stronger economy than we've had in decades, and the entire world will be better for it.
as the junk bond prices decreases and the demand for yield increases, this increases the cost of borrowing and can potentially create a ripple effect of defaults.
recent cracks where these these companies issued junk bonds include First Brands, Tricolor, and Saks: https://www.bloomberg.com/news/features/2025-10-12/first-bra...
Borrowing rates reflect other indices like 10-year treasuries, not short-term ones.
Feedback effects ("ripple effect" in your usage) are a genuine risk of economic systems, but by their nature they aren't predictable. You get the non-linear feedback we're all terrified of (a "crash") when some buffer or another runs dry: some notable demographic needs money, normally gets it from place X (for example: selling stock, repackaging and selling mortgage securities, raising a series B round, issuing corporate bonds, etc...) and suddenly X doesn't produce the same returns. So they need to do another one of those things, which drives that price down, which causes the demographics that depend on that resource to run dry, etc...
This is a metric for just one buffer: the amount of cash available to issuers of high interest bonds. Is that the tipping point? We don't know, and won't until it tips.
I used to be pretty into junk bonds during my MBA (I don't do this at all professionally, so YMMV with my commentary here), and I think, as usual, a lot of context would help with understanding what this could mean, which ajross described. In the most simple terms, as other have also mentioned, it's basically non-investment grade companies (and there are a lot of em - you'd be surprised at the names on the list) now have to pay more for money. This could mean that investors are worried and want more compensation for risk, which means that the reality of the economy is shakier. OTOH, it could mean that investors are being more realistic, and not letting risky companies just have cheaper money to make value destructive decisions could be a good sign of sanity in the markets, and thus (in theory) the economy. It's hard to know with a simple headline or article. Even if you dig into all the numbers and do all the reading, it's still hard to know since the world is really complex.
I look at this as a single data point amongst many re: how I end up assessing my feelings about the economy. Truth be told, I'm probably more concerned about what lots of news outlets are discussing - all the AI capex spend. Apparently there's more financing being negotiated with fewer restrictions on the debt, which tends to be a really bad sign of a bubble.
Basically, everyone is placing too many bets. AI stocks are bets, sure. VCs have too much money in play. Datacenter spending is a giant bet.
But the Trump administration is also placing bets on world trade markets, expecting to win the trade wars it keeps provoking. Likewise it's betting on US labor stability with mass deportations, and now para-sorta-maybe-martial-law decrees. I mean, let's be honest: the risk of a general strike in the USA is probably higher now than at any point in the last century.
Oh, and Russia seems about to hit a tipping point in its refining capacity, which says dark things about Europe too if that goes awry.
Basically most of these look "not really that scary" from a fundamentals perspective. But what are the chances we make it through the next 9-12 months with none of them having gone sour? And any of them could be the trigger for a real market crash!
I'm moving almost everything out of volatiles, personally. The loss of the next 10-20% of upside seems like a good bet vs. what-maybe-50%-or-more downside.
When Junk Bond yields are low, it suggests investor confidence is high (and a low risk of corporates defaulting). The article notes that yields are rising, this is understood to be a signal of economic uncertainty (i.e. greater chance of defaults/increased risk of investing.)
There are considerations to be made regarding about what caused the changes - in this case the presidents declaration of additional tariffs on China. Since this is an arbitrary decision, and not say the result of an economic trend, the certainty around the correlation is lower. Nevertheless the randomness of the actions are themselves a source of uncertainty, which too scares away investment.
In fact, lots of business had the opportunity to roll their debt over the past year, so bankruptcy in the medium term seems unlikely.
The broader question is why now and so quickly. In my view, people got way over their skis in rate-based trades which drove a lot of things higher including tech multiples. This likely why we also have the NASDAQ down 3.5% in a single session.
Running an economy based on the whims of a decrepit old man and the weirdos he surrounds himself with introduces a lot of risk. It doesn’t mean that the end is nigh, but large money flows are going towards lower risk.
Whether it leads to a lot of defaults depends on a lot of factors. A sell-off in bonds can really screw a company if it happens to have immediate financing needs at the time, but otherwise it doesn't really impact the company directly. Junk bonds are, as the name suggests, known to be risky assets, so they are generally the first to be sold when things get a bit choppy and investors decide to sit the market out for a bit to see how events unfold.
This seems like it is pretty clearly a response to the recent tariff escalation so, as with all the other tariff announcements, it will depend on whether the recent announcement is a change in policy or another negotiating tactic.
You also see a lot of headlines like "worst losses in six months!" "biggest sell-off since September!" but these are fairly short timeframes and a lot of this is just trying to make some news out of the usual market noise.
So in worst case enough triggers might result in larger collapse. Basically big enough issue anywhere not just in AI might bring rest down with it.
> The losses accelerated after President Trump threatened to impose huge tariffs on imports from China and said he saw no reason to meet with Chinese President Xi Jinping, causing concerns about trade relations between the world’s two biggest economies.
> The weekly loss of 0.73% was also the biggest since April. The losses spanned across ratings amid the renewed tariff fears. Junk bond yields rose 15 basis on Friday and 31 basis for the week, the biggest increase in six months.
> CCC yields rose above 10% to a five-week high of 10.14% and spreads widened to a six-week high of 632 basis points. Spreads climbed 32 basis points on Friday, the most in one day since April. CCCs racked up a loss of 0.6% on Friday, the worst one-day loss in six months. CCCs closed the week with a loss of 1.05%, also the most in six months.
graph https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848...