Unsurprisingly, companies selling low-rated junk debt are being hit the worst.

Last year, according to S&P Global Ratings, corporate bond defaults increased by a disconcerting 80%. High interest rates coupled with high inflation have made it a struggle for companies to make good on their commitments even as waves of new bond buyers continue to arrive, eager to lock in higher yields before rates go down. Demand remains strong for junk bonds and hybrid debt, but for companies with poor liquidity, poor to negative cash flow, and/or an outsized existing debt burden, the result is a compelling setup for even more defaults in 2024.

For now, with rate cuts on the horizon, interest remains strong in junk bond debt even as effective yields have fallen from their 2023 highs, and yield spreads remain relatively low:

Junk Bond Effective Yields, Summer 2022 to Now

Meanwhile, debts that were financed in a low-interest rate environment are due to mature in the next few years, to the tune of over $1.8 trillion by 2028 according to the Fed. When those payments come due, more companies will fall to the default wave. And if the junk bond market goes off of a cliff, it could pop the broader $13.7 trillion corporate bond bubble and take the rest of the economy with it.

Even Bank of America is calling the overheated bond market "bubbly." With no sign of a short-term slowdown in bond sales, the pressure on premiums is expected to keep increasing for high-risk debt as borrowers rush to fill the demand for high-yield offerings before the Fed cuts rates.