Defaults of high-yield corporate bonds are accelerating and could bring a $46 billion wave of distressed debt in 2024, Bank of America says

• The US could see a $46 billion wave of distressed high-yield debt next year, BofA warned.
• That's because defaults are accelerating and could speed up at 1.5 times the pace next year.

Brace for a wave of distressed debt to hit the market as higher borrowing costs cause corporate defaults to accelerate, Bank of America warned.

The bank's strategists expected more pain stemming from higher interest rates, with the central bank having raised its fed funds rate target to the highest level since 2001.

"We expect defaults to continue to accelerate going into 2024," Bank of America warned in a note on Friday. "From $30bn in DM USD HY impaired face value over the past 12 months, we project the pace to increase 1.5x to $46bn over the next year for a 3.4% default rate."

Most of those defaults are likely to take place in three areas, the bank said, with an estimated $14 billion of distressed debt showing up in technology, media, and telecom, $13 billion in the health sector, and $8 billion in the cable sector.

That amounts to $35 billion in those three sectors alone, or around 75% of all high-yield defaults expected next year, strategists said.

To be sure, benchmark Treasury yields have fallen sharply this week after surging last month to the highest level in 16 years.

But effective yields on some high-yield corporate debt are trading between 8%-9%, according to the ICE Bank of America US High Yield Index.

Experts have been warning of a wave of defaults and bankruptcies to hit the market, especially as interest rates remain higher-for-longer.

Fitch Ratings recently estimated the high-yield bond default rate will range between 4.5% and 5% by the end of this year. Meanwhile, total US bankruptcies and debt defaults could peak sometime in the first quarter of 2024, Charles Schwab estimated.