Defaults of risky high-yield corporate debt are rising at the fastest pace since the pandemic

• The default rate for US speculative-grade debt has been rising and notched 4.2% in July.
• That's the highest rate since 2021, according to Societe Generale.
• And that pace is likely to accelerate due to a higher interest rates, strategists said.

Defaults on risky, high-yield corporate debt are now rising at the fastest pace since the pandemic, according to Societe Generale, another sign that America's debt troubles could be approaching a turning point.

The default rate for US speculative-grade debt has been climbing and notched 4.2% in July, the research firm said in a note on Wednesday, matching rates seen in 2021.

But that's still below 2020's peak, which saw the default rate top 8%, according to Moody's data cited by Societe Generale.

The pace of defaults is likely to accelerate as markets navigate a higher-interest-rate environment, strategists said. Older corporate bonds with low coupons are set to mature over the coming months and years. That means firms will need to issue new bonds with higher coupons, which will raise the cost of borrowing.

"In our view the rising funding costs are going to put a further strain on the weaker companies in the US market … unless economic growth picks up substantially. This is not our central scenario, hence we believe default rates will continue to rise, putting more and more pressure on spreads as well as on the other credit markets," strategists warned.

Markets have grown more concerned over corporate debt pressures as the Fed aggressively raised the cost of borrowing over the past year and a half to tame high inflation.

The federal funds rate is now hovering between 5.25%-5.5%, the highest in over 20 years. Markets are pricing in a 44% chance rates could rise even higher by the end of the year, according to the CME FedWatch tool. 

Meanwhile, corporate debt defaults in 2023 have already surpassed last year's total, Moody's data shows.