In the aftermath of the Federal Reserve's forceful credit-tightening measures, companies with higher risk profiles are defaulting on loans at a significantly faster rate compared to high-yield bonds.

Morgan Stanley's analysis reveals that the one-year default rate for borrowers of US loans has surged to 4%, which is markedly higher than the 2.7% default rate observed for high-yield bonds. This substantial gap of 1.3 percentage points between loan defaults and junk bond delinquencies is an unprecedented occurrence in the last three decades.

Amanda Lynam, Head of Macro Credit Research at BlackRock Inc., pointed out that the impact of higher debt costs is immediately affecting loan borrowers due to the floating-rate nature of their debt. On the other hand, the impact on the high-yield bond market is taking longer to materialize.

This rise in defaults among riskier companies has transpired as the US government pursued measures to counter persistent inflation by significantly raising borrowing costs. As a result, those with floating-rate debt, such as loan borrowers, have been confronted with escalating interest expenses alongside the central bank's series of rate hikes