US High-Yield Credit Strategy — Don't Take Rising Distress at Face Value: Why HY and Loan Defaults Are Set to Diverge in 2027

We forecast default rates will rise to 4.5% for high yield bonds and 8.1% for leveraged loans by year-end 2027. Both markets' distress ratios are increasing, signaling stress ahead for refinancing and new corporate activity, particularly in a high-rate environment. The sharp rise in distress across both markets raises concerns: for high yield, the distress ratio has spiked sharply since June 2025 against a backdrop of weakness concentrated in lower-rated credits, comparable to the pandemic and the 2016 energy crash. For loans, software-sector weakness and concerns over AI-driven disruption have weighed on prices, yet the loan distress ratio still looks relatively benign versus its own history. We forecast the default rate will remain modest for high yield while proving considerably more severe for loans, because the sources and severity of distress differ significantly between the two markets, and the surface-level distress visible in secondary markets does not tell the full story.