Corporate Bond Valuations at Risk Amid Rising Downgrades and Economic Uncertainty.

Credit rating downgrades are on the rise, with over $94 billion of high-grade US debt downgraded in Q2, compared to just $78 billion of upgrades. This is the first time since early 2021 that downgrades have outpaced upgrades. Economic uncertainty and high corporate bond valuations are causing concerns about credit quality, making credit picking crucial. Investors are cautious in industries like retail and metals, but optimistic overall, with US corporate yields remaining high and default protection sales increasing.

Credit rating downgrades are surging, with over $94 billion of high-grade US debt downgraded in the second quarter, compared to just $78 billion of upgrades. This marks the first time since early 2021 that downgrades have outpaced upgrades [1]. The trend reflects growing concerns about corporate debt valuations and credit quality amidst economic uncertainty.

According to JPMorgan Chase & Co. strategists, the economic outlook remains uncertain, with potential escalations in trade wars and other global risks. Corporate bond valuations are high, with US investment-grade spreads at around 0.8 percentage points, well below the two-decade average of 1.5 percentage points [1]. Junk securities spreads are closer to 2.8 percentage points, far below the 4.9 percentage point average over the past 20 years [1].

Investors are becoming increasingly cautious, particularly in sectors like retail and metals, where long-term decline or near-term risk of boosting borrowings is evident. Pacific Investment Management Co. (Pimco), overseeing $2 trillion, is leaning into sectors with strong free cash flow and earnings growth trends, such as banks and pipeline companies, while maintaining a light footprint in riskier areas [1].

Despite the rising concerns, many investors remain optimistic about company credit. US corporate yields remain high by historical standards, and default protection sales are increasing, with the main investment-grade US credit-default swap index reaching over $105 billion, the most in at least three years [1]. However, by some measures, including ratings downgrades and companies losing investment-grade status, the outlook is deteriorating.

The second quarter saw $34 billion of debt known as Fallen Angels, or bonds cut to junk, compared to just $3 billion of rising stars [1]. Additionally, high-yield borrowers are delaying about 9% of interest payments globally, up from about 4% in 2020 [1]. These factors highlight the vulnerability of companies to economic downturns and the importance of accurate credit picking.

Grove, an institutional-grade credit infrastructure protocol, has emerged to bridge the gap between traditional finance (TradFi) and decentralized finance (DeFi). Grove Labs, a subsidiary of Steakhouse Financial, has launched a $1 billion allocation into the Janus Henderson Anemoy AAA CLO Strategy (JAAA), a tokenized, onchain vehicle [2]. This strategy, managed by the same portfolio managers behind Janus Henderson’s $21 billion AAA CLO ETF, offers global onchain investors an institutional-grade solution seeking capital preservation with attractive yield.

As economic uncertainty persists, investors must navigate the complexities of credit ratings and corporate bond valuations with caution. The rising trend in credit rating downgrades signals a need for heightened vigilance and strategic investment decisions.

References:
[1] https://www.bloomberg.com/news/articles/2025-07-12/worst-spate-of-downgrades-since-2021-signals-pain-credit-weekly
[2] https://www.businesswire.com/news/home/20250624393365/en/Grove-Announces-Launch-of-Institutional-Grade-Credit-Infrastructure-DeFi-Protocol-with-%241-Billion-Allocation-to-Tokenized-Janus-Henderson-Anemoy-AAA-CLO-Strategy