Junk-Rated College Bonds: Navigating Liquidity Risks in the Shadow of Delayed Pricing and Federal Funding Shifts

The high-yield bond market is in the throes of a liquidity crisis, exacerbated by delayed index inclusion decisions and shifting federal priorities. Nowhere is this tension sharper than in junk-rated college bonds, where institutions face a precarious balancing act between leveraging federal infrastructure funds and navigating the treacherous waters of thin trading volumes and policy uncertainty. Let's dissect the risks—and potential rewards—of this market.

The Liquidity Crisis: When Bonds Enter "No Man's Land"

The recent saga of Warner Bros Discovery (WBD) offers a microcosm of the broader junk bond liquidity problem. After its $14.3 billion debt was downgraded to junk in June 2025, WBD's bonds faced a critical hurdle: index exclusion delays. ICE's decision to postpone adding WBD to its high-yield indices until August 2025 created a liquidity vacuum. Approximately 35% of high-yield portfolios, benchmarked to ICE indices, were barred from purchasing the debt, forcing institutional holders to offload the bonds—a move complicated by a lack of buyers. This “no man's land” scenario has thinned trading volumes to near-paralytic levels, with the 4.279% March 2032 issue trading at a 300-basis-point spread to Treasury yields—a stark premium reflecting its illiquidity.

The stock's decline—from $45 in early 2023 to $22 by June 2025—mirrors the debt's deteriorating market perception, further squeezing liquidity.

Federal Infrastructure Funding: A Double-Edged Sword

The $1.2 trillion Bipartisan Infrastructure Law (BIL), passed in 2021, promised to revitalize public projects. While states have used this funding to issue bonds for roads, water systems, and schools, its impact on higher education is uneven. State initiatives like Massachusetts' $2.5 billion BRIGHT Act (2025) directly fund college infrastructure, reducing reliance on private borrowing. However, institutions with heavy private equity (PE) commitments—such as Harvard ($8.2B unfunded PE obligations) and Yale ($8.1B)—face a different crisis: liquidity-straining capital calls to cover these investments. Federal grant freezes, like the $175M suspension at the University of Pennsylvania, force these schools to choose between honoring PE commitments or maintaining research budgets.

The result? A surge in college bond issuances to bridge gaps. Harvard's $450M bond sale in 2024 (pushing total debt to $7.6B) and Princeton's $320M taxable bond issue highlight this trend. Yet, these bonds face a Catch-22: while federal infrastructure spending boosts state coffers, elite colleges are increasingly isolated in a market where their debt is deemed “junk” due to structural risks like overleveraged balance sheets.

Investment Strategy: Where to Look—and When to Run

1. Opportunistic Entry Before August 2025:
   WBD's bonds, particularly those tied to its Streaming & Studios division, offer a chance to profit from the delayed ICE rebalancing. The 4.279% March 2032 issue could rally sharply once included in indices, but buyers must monitor WBD's leverage ratio (projected to hit 4.3x by year-end) and its $37B debt split between its streaming and struggling linear divisions.

2. Diversify into Infrastructure-Backed Bonds:
   Bonds tied to projects funded by the BIL—such as water systems or renewable energy—benefit from tax-exempt status and steady demand. ETFs like SPDR Barclays High-Yield Municipal Bond ETF (HYMB) offer exposure to this sector while avoiding single-issuer risk.

3. Avoid Short-Term Debt:
   Junk-rated bonds with maturities under five years, especially those linked to institutions facing federal grant cuts (e.g., Columbia, Cornell), are prone to widening spreads as liquidity risks crystallize.

Key Risks to Monitor

• Index Inclusion Delays: If ICE postpones WBD's inclusion beyond August, spreads could widen further, punishing early buyers.
• Tax Policy Uncertainty: The 2025 expiration of the Tax Cuts and Jobs Act's municipal bond exemptions could disrupt demand for education-linked debt.
• Project 2025: Trump's proposal to dissolve the Department of Education (USED) and privatize student loans could destabilize institutional finances, increasing default risks.

Conclusion: A Delicate Dance Between Liquidity and Policy

Junk-rated college bonds are now a litmus test for market resilience. While federal infrastructure funding has bolstered public projects, it has not insulated elite universities from the liquidity crunch caused by PE overhangs and grant volatility. Investors must tread carefully: target bonds with stable cash flows, time entries to index rebalancing events, and avoid overexposure to institutions with execution risks in corporate or policy shifts. In a world where liquidity is the new alpha, patience—and a watchful eye on Washington—will be rewarded.

The next few months will test whether these bonds can find buyers in the "no man's land" or become the next chapter in the high-yield market's cautionary tale.

This widening gap underscores the growing risk premium investors demand for holding these instruments.