Strategists at JPMorgan Chase & Co. wrote on Tuesday that the tail end of deep distress in the leveraged loan market has climbed to its highest level since the early days of the pandemic, with technology standing out as the single most pressured sector.

Specifically, loans trading below 60% of face value — the deeply distressed level — have grown from US$40 billion a year ago to US$65 billion, the highest since March 2020. Distressed leveraged loans, meaning those trading at 80% of face value or below, are also on the rise, totaling US$139.8 billion, a surge of nearly 90% over the past 12 months and just US$4 billion shy of the May 2020 peak, according to a report by strategists including Nelson Jantzen.

Currently, about 141 leveraged loan issuers are trading below 80% of face value, 35 more than a year earlier, with software providers CDK Global, QLIK Technologies Inc. and Quest Software among the largest contributors. The report shows that distressed loans are most concentrated in the technology sector, which accounts for 39% of the total at US$54.4 billion. Software companies are confronting an increasingly difficult refinancing environment as a wall of more than US$100 billion in maturing debt approaches.

The sector has come under pressure this year amid growing market concerns that advances in artificial intelligence will disrupt businesses that provide software services. In the riskiest segment of the leveraged loan market, CCC-rated loans — the lowest rung of junk debt — have returned -1.97% year to date, while every other junk-rated category has posted gains.

In high yield bonds, JPMorgan data show that CCC-rated spreads have jumped above 1,000 basis points, the highest since the 2023 regional banking crisis, when investors sold off risky debt. CCC-rated bond yields have climbed to 15.58%, the highest since November 2022. In recent months, CCC-rated spreads have continued to widen as global bond yields soared and the Federal Reserve shifted toward tighter policy, pushing up debt servicing and refinancing costs for highly leveraged borrowers just as a large volume of bonds and loans nears maturity.

JPMorgan strategists noted that the volume of high yield bonds affected by defaults so far this year has exceeded that of loans, "the first time this has happened since 2020." The bank expects default rates for high yield bonds and leveraged loans to rise next year to 2.75% and 4.50%, respectively, from its 2026 forecasts of 2.25% and 4.50%.