The bond market continues to issue warnings! U.S. junk bonds face their worst quarter since 2022, and tech bonds are deep in AI "disruption panic."

The U.S. junk bond market is going through its toughest quarter in nearly four years. The combined impact of artificial intelligence hitting the tech sector, a surge in oil prices, and rising U.S. Treasury yields is weighing on investors’ risk appetite.

On March 31, Bloomberg data showed that, as of Monday’s close, the quarterly return for U.S. junk bonds fell 1.1% this quarter. Among them, the CCC-rated bonds with the lowest ratings saw the biggest drop, down 1.85%. This is the first time junk bonds have posted a negative quarterly return since Q2 2022, when the category’s quarter-on-quarter decline was as high as 9.8%.

Market participants generally believe this decline is fundamentally different from the situation in 2022. The current economic fundamentals are more solid, and the Federal Reserve is expected to keep rates steady or pivot to rate cuts within the year. Several analysts said that the risk of large-scale defaults remains limited; the market adjustment is more of an orderly reset rather than panic selling.

Tech led the decline, while energy bonds rose against the trend

The decline in this quarter’s junk bonds was mainly driven by the tech sector. Bloomberg data showed that the return on tech-focused high-yield bonds fell by more than 3.4% this quarter, with bonds from software companies hit especially hard by disruption-related expectations tied to artificial intelligence. However, Corry Short, a credit strategist at Barclays, pointed out that the tech sector accounts for less than 5% of the junk bond market, so the overall drag is relatively limited. He said that parts of the market with higher software exposure are indeed lagging the broader market.

At the same time, energy high-yield bonds rose by 2% against the trend, benefiting from a sharp jump in oil prices. This quarter, Brent crude prices broke through the $100-per-barrel mark and are currently hovering around $110. Since January 1, Brent crude has gained a total of 78%, while WTI is up by about 80%.

Vishwas Patkar, head of the U.S. credit strategy team at Morgan Stanley, said energy is the only sector where spreads have tightened since the start of the year, while the amount of spread widening in the tech sector far exceeds that of the overall index.

Spread widening is limited—nothing like 2022

Despite some volatility in market sentiment, the spread between junk bonds and U.S. Treasuries is still at around 300 basis points, Patkar said, adding that it remains close to a “historical low.” He said:

“I wouldn’t say this is broad-based panic, but over the past few weeks, spreads have indeed widened. The market has injected some risk premium, but overall this is an orderly reset rather than panic-driven selling.”

Barclays’ Short further noted that the main reason for this quarter’s negative returns is the movement in U.S. Treasury yields, not a significant widening of credit spreads.

Looking back at 2022, junk bonds’ full-year return fell 11.1%. At the time, post-pandemic demand surged and the oil-price shock triggered by the Russia-Ukraine conflict pushed inflation higher. The Fed cumulatively raised rates by more than 400 basis points that year, dealing a double blow to high-yield bonds.

Bob Kricheff, portfolio manager at Shenkman Capital Management, said that the 2026 market is entirely different from 2022. The current financing market is operating normally, and healthy access to capital markets has been in place for quite a long time—something that did not exist in 2022.

Default risk is controllable, and market worries may be overinterpreted

Several market participants hold a relatively optimistic view of the current situation. Dave J. Breazzano, co-founder of Polen Capital Credit LLC, said that by the end of last year, market pricing had almost fully reflected the very tight spread levels. The unease stemming from private credit, artificial intelligence, and oil-price volatility pushed this quarter’s returns into negative territory, but the likelihood of large-scale defaults remains low. The public junk bond market has not yet shown any major hidden concerns about credit quality.

Breazzano added that market worries about inflation and major disruption to the high-yield bond market from artificial intelligence are, to a certain extent, “overstated,” and that the current market volatility should gradually fade without causing prolonged major negative impacts.

In terms of rate expectations, at one point bond traders priced the probability of this year’s Fed rate hikes to nearly 50%, but last week they shifted back to betting on rate cuts. Investors and analysts broadly expect the Federal Reserve to keep rates steady or ease moderately within the year, which provides some support for the junk bond market.