Amanda Lynam, head of credit strategy at Goldman Sachs Group, said the surge in corporate bond supply in the US high-yield market is beginning to overwhelm bond investors and has pushed risk premiums to their highest level in five months.

Speaking in an interview on Monday, Amanda Lynam said: "The market is bracing for the kind of episodic indigestion we saw in the investment-grade bond market earlier this summer. The same thing is now happening in the high-yield bond market."

A series of large high-yield bond (junk bond) issuances, including a $10 billion bond from SoftBank Group, drove September issuance to $38.51 billion as of last Friday, making September the busiest month this year for the high-yield bond market. Meanwhile, Paramount Skydance (PSKY.US) is seeking to issue a total of $44.4 billion in investment-grade and high-yield bonds this week.

Amanda Lynam said that with bond yields rising and a large volume of bond issuance expected later this year, the recent flurry of activity is putting pressure on corporate bond spreads. Data shows that as of last Friday's close, the average extra yield investors demand to hold corporate junk bonds rather than US Treasuries widened by 12 basis points to 294 basis points, the highest level since April. For bonds rated CCC, the lowest quality tier, the average spread closed at 968 basis points, the highest since November 2023.

Elevated bond yields make corporate bonds an attractive investment opportunity, particularly favored by yield-oriented buyers. However, Goldman Sachs is concerned that higher interest rates are beginning to pressure credit spreads. Amanda Lynam said: "At what point do further rises in rates and increased volatility begin to erode investor confidence in allocating to corporate credit assets? That has been a very strong tailwind keeping spreads stable. So this is exactly what we are watching most closely right now."

People familiar with the matter revealed that BBB-rated bond spreads were widening on Monday as banks held conference calls with investors to discuss Paramount Skydance's plan to issue approximately $32 billion in investment-grade debt and an equivalent $12.4 billion in junk bonds. According to Trace data, SpaceX's (SPCX.US) bonds issued in June with a 5.65% coupon maturing in 2033 saw their spreads widen by about 36 basis points to 177 basis points. Oracle's (ORCL.US) bonds with a 2.95% coupon maturing in 2030 saw spreads widen by about 15 basis points to 160 basis points.

Mark Clegg, a senior fixed-income trader at Allspring Global Investments, said that if the Paramount Skydance deal is well received by the market, it could restore market confidence and reopen the financing door for issuers that have been sitting on the sidelines. Mark Clegg said: "The deal itself is not the problem, but its size is forcing investors to reassess spread risk across the entire market."

The average spread on US high-grade bonds widened by 3 basis points to 80 basis points, the largest weakening since March. This level is already close to Goldman Sachs' third-quarter forecast of 85 basis points. Goldman Sachs statistics show that so far this year, total bond supply related to artificial intelligence (AI) projects has approached $600 billion. Amanda Lynam said: "That number is truly extraordinary." She added that only about 40% of that is related to hyperscalers, highlighting just how broad AI-related exposure has become.

The Goldman Sachs team prefers BBB-rated bonds within investment-grade credit, because a large amount of AI-related debt comes from AA-rated and BB-rated issuers. Amanda Lynam said: "We may have passed the peak of AI-themed bond supply for 2026, as the market has already shown some indigestion and fatigue, and I think 2027 will be an acceleration year."