The head of credit strategy at Goldman Sachs Group said a surge in corporate bond supply in the US high-yield market is starting to overwhelm bond investors, pushing risk premiums to their highest level in five months.

Amanda Lynam, Goldman Sachs' chief credit strategist, said in an interview on Monday that "the market is bracing for a bout of indigestion similar to what appeared in the investment-grade bond market earlier this summer. Now the high-yield bond market is experiencing the same thing."

A string of large junk bond issuances, including a $10 billion deal from SoftBank Group, has pushed September high-yield bond issuance to $38.51 billion, making this month the busiest for high-yield issuance so far this year.

Meanwhile, Paramount Skydance Corp. is seeking to raise $44.4 billion this week through investment-grade and high-yield bonds.

Lynam said this wave of issuance, combined with a large volume of deals expected to flood in later this year and rising bond yields, is putting pressure on corporate bond spreads.

Bloomberg index data show that as of Friday's close, the average extra yield investors demand to hold corporate junk bonds relative to US Treasuries widened by 12 basis points to 294 basis points, the highest since April. The average spread on bonds rated CCC, the lowest quality tier, closed at 968 basis points, the highest since November 2023.

Rising bond yields have boosted the investment appeal of corporate bonds, especially for yield-focused buyers. What Goldman Sachs worries about is that further increases in interest rates could start to weigh on credit spreads.

Lynam said, "At what point does rising rate volatility undermine investors' confidence in allocating to corporate credit? That allocation demand has been a very strong supportive factor helping to keep spreads stable at low levels. So this is what we are watching most closely right now."

Lynam said Goldman Sachs calculations show that bond market financing supply related to AI projects so far this year has approached $600 billion, "which is an extraordinary number." She added that only about 40% of that is related to hyperscale cloud service providers, highlighting the breadth of AI-related financing.

The average spread on US high-grade corporate bonds widened by 3 basis points to 80 basis points, the largest widening since March. This level is already close to Goldman Sachs' third-quarter forecast of 85 basis points.