The sharp selloff in US Treasuries is beginning to spill over into corporate America, forcing companies to adjust their financing plans and even raising the specter of defaults among the lowest-rated borrowers.

Driven by Treasury yields climbing to multi-year highs and investors demanding greater risk compensation for lending to such companies, borrowing costs for the lowest-rated firms rose this month to 17%, the highest level since May 2020.

Risk premiums for companies rated CCC and below widened to 12 percentage points, the highest since 2022.

Analysts say companies with floating-rate loans and those needing to refinance debt in the coming months have been hit hardest by the Treasury selloff. Last week, the 10-year Treasury yield hit its highest level since 2002.

"Investors are increasingly demanding greater compensation for taking on corporate credit risk," said James Reilly, senior markets economist at Capital Economics.

The cooling effect of the turmoil in the Treasury market is already showing. Bank of America lowered its forecast for US dollar investment-grade corporate bond issuance this month to about $110 billion from roughly $160 billion.

On the corporate side, some deals have already felt investors' caution. US media group Paramount-Skydance issued $52 billion in bonds last week to fund its $110 billion acquisition of Warner Bros. Discovery. According to people familiar with the matter, in an unusual development, demand for Paramount's two-year bonds was nearly double that for its 30-year bonds, reflecting investor concerns that rising rates will erode the value of long-dated bonds.

As a result, investors received larger allocations of long-dated bonds than expected, and those bonds were heavily sold off after listing. "With investors being more selective in choosing targets, some deals have been temporarily canceled or postponed. The weak performance of Paramount-Skydance's second-lien bonds, with its 2036 notes falling several percentage points since issuance, is evidence of this," said James Carter, co-head of fixed income at wealth manager W1M.

For now, many companies prefer to issue shorter-dated bonds in the hope of refinancing at lower rates in the future. "They don't want to lock in high financing costs now. Entering the market to raise funds at this moment requires a more careful plan," said Eileen Brown, co-head of global capital markets for the Americas at BNP Paribas.

US spice and seasoning maker McCormick told investors last week that given the recent sharp rise in borrowing costs, it is evaluating the bond issuance package tied to its upcoming large acquisition of Unilever's food business, including the currency, duration and mix of fixed- and floating-rate debt. "This is the key issue on investors' minds right now. We continue to closely track market developments and assess our debt financing strategy," McCormick CFO Marcos Gabriel said on an earnings call.

Normally, such a large rise in bond yields this year would hit the entire market, from the weakest companies to highly rated firms. But a considerable portion of investment-grade issuance activity this year has been unaffected, led mainly by companies pursuing AI projects. In their view, the urgency of building data centers outweighs the pressure from borrowing costs rising by one or two percentage points.

Still, analysts believe that if Treasury yields continue to climb, the credit market will come under broad pressure. Many companies borrowed in the early 2020s when rates were at historic lows, and when that existing debt matures and needs refinancing, higher rates could deal a blow to these firms.

Moody's estimated last year that between 2026 and 2030, maturing US investment-grade corporate debt will reach a record $1.45 trillion. Rising rates will force companies' profit growth to keep pace with the increase in borrowing costs.

"If rates remain elevated in 2027, 2028 and even the latter part of this decade, the corporate debt system could face severe shocks," said Michael Zdinak, head of US consumer market services at S&P Global.

Zdinak added that if borrowing costs remain high next year, companies will "delay investment, M&A, share buybacks and expansion plans. As long as the returns on such discretionary investment are no longer worthwhile relative to higher rates, companies will hold off on such spending."

Futures market traders are betting the Federal Reserve will raise rates three to four more times, pushing rates higher from the current 3.75%-4% range by early 2028. "If corporate profits cannot grow in line with borrowing costs, then substantive credit risk will erupt," said Atsi Sheth, chief credit officer at Moody's.