Credit stress in the US leveraged loan market continues to intensify, with the volume of severely distressed loans expanding, the technology sector 鈥?particularly software 鈥?under the heaviest pressure, and corporate refinancing burdens and default risks building further.

Strategists at JPMorgan said in a report on Tuesday that the volume of "severely discounted" loans trading below 60% of face value has risen to $65 billion from $40 billion a year earlier, the highest since March 2020. At the same time, the total volume of distressed loans trading at or below 80% of face value has climbed to $139.8 billion, up nearly 90% from 12 months ago and just $4 billion below the record peak set in May 2020.

In terms of the number of issuers, roughly 141 leveraged loan issuers are currently trading below 80% of face value, an increase of 35 from a year ago. Among them, software providers CDK Global, QLIK Technologies and Quest Software are the largest contributors to the distressed loan total.

Technology sector bears the heaviest burden as software refinancing pressure mounts

The technology sector is the most concentrated area of severely distressed loans, accounting for 39%, or $54.4 billion. Software companies in particular face significant refinancing pressure, with more than $100 billion of debt maturing in the future; at the same time, the rapid development of artificial intelligence technology has heightened market concerns that traditional software service models could be disrupted, further weighing on related debt prices.

Credit pressure is already reflected in loan returns. CCC-rated loans have posted a year-to-date return of negative 1.97%, the only rating category among junk-rated loans to record a negative return, while all other rating categories have delivered positive returns.

JPMorgan noted that persistently rising global bond yields and the Federal Reserve's shift toward a tightening stance have pushed up debt servicing and refinancing costs for highly leveraged companies; meanwhile, a large concentration of maturing bonds and loans is further adding to corporate funding pressure.

Rising debt costs push credit stress into the high-yield bond market

Pressure from high-risk debt is spreading further into the high-yield bond market. CCC-rated bond spreads have broken through 1,000 basis points, rising to their highest level since the regional banking crisis in 2023; yields have climbed to 15.58%, the highest since November 2022.

JPMorgan expects the high-yield bond default rate to rise to 2.75% in 2026 from its current forecast of 2.25%, while the leveraged loan default rate will rise to 4.50%.

Notably, the volume of high-yield bonds affected by defaults so far this year has exceeded the volume of loans, the first time this has happened since 2020, indicating that credit risk is spreading from the leveraged loan market to the high-yield bond market.