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Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

One thought is increasingly keeping credit investors up at night.

What if many more companies suddenly go bankrupt, leaving billions of dollars of debts unpaid and wreaking havoc on investment firms? This fear is real enough that bond buyers are taking fewer chances and passing up on loads of potential yield to protect themselves against this possibility.

Investors are demanding 16.6 percentage points of extra yield to own the lowest-rated U.S. corporate bonds compared with the highest-rated ones, the largest premium since 2009. They're requiring the greatest amount of extra yield to own the top-rated junk bonds over the lowest-rated investment-grade ones since 2011, Bank of America Merrill Lynch index data show.

Picky Credit Buyers
Investors prefer even the lowest-rated investment-grade bonds over top-tier junk debt.
Source: Bank of America Merrill Lynch index data

Participants in Bank of America's latest monthly survey of corporate-debt investors "became decidedly more concerned about credit risk in high yield,'' with a majority of investors now expecting default rates to rise to as much as 6 percent in the next 12 months, according to a report on Tuesday by analysts led by Michael Contopoulos.

Some may argue these investors are being overly cautious, that a U.S. recession isn't the most likely scenario over the next year and therefore buyers should take advantage of the widening yields, which are averaging 19.3 percent among the lowest-rated corporate bonds. It's hard to find much yield at all among safer debt, such as U.S. Treasuries or German government bonds. All the cash still sloshing around a world being stimulated by central banks still has to go somewhere, right?

Split Paths
Investors are trying to hide in the safest bonds while shunning the lowest-rated ones.
Source: Bank of America Merrill Lynch index data

Well, maybe not. As Bank of America analysts point out, credit conditions can weaken well before a recession sets in. That means that some of this wealth that's been pumped into the financial system through debt markets may very well really be imagined, only to disappear along with the fortunes of a swelling pool of unfortunate companies.

"Using economic forecasting to predict the credit cycle gets it backwards because the credit cycle predicts the business cycle, not the other way around,'' said Jeffrey Rosenberg, BlackRock's chief investment strategist for fixed income, in a report distributed Tuesday.  "You never see the recession coming -- it’s always a surprise. And that generally is because you are looking for its signs in all the wrong places.'' 

In other words, this deepening weakness in corporate credit signals worse days ahead for businesses that are still managing to stumble along. The rest of the world appears to be taking some cues from corporate-debt markets or else are worried about the same negative outcome as traditionally paranoid credit traders.

Global equities are on the brink of a bear market. The heads of companies around the world are growing more pessimistic about global growth, with 23 percent expecting the economic outlook to worsen this year, up from 17 percent in 2015, according to a survey by PricewaterhouseCoopers.

Already, high-yield bonds globally have lost an estimated $159.5 billion of market value in the past six months. While that's typically been a buying opportunity over the past six years, the recent weakness is painting a picture of more pain ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net