That marks the end of years of growth — including a record for issuance in 2021 as borrowers sought to lock in ultra-low yields in the wake of the pandemic. It comes as chief financial officers face refinancing costs at almost three times the price they would have paid at the start of 2022 — leading some to look at alternative funding options — or even to pay down debt.

“The biggest driver is the impact of the leveraged loan and private credit market which has seen a lot of volume,” said Colleen Cunniffe, head of global taxable credit research at Vanguard Group Inc.

As interest rate hikes got underway last year, borrowers picked leveraged loans over junk bonds to finance many deals because their floating rate nature and typically shorter maturities were seen as more attractive to investors. At the same time, many buyouts — including multi-billion deals like Zendesk Inc. — were funded by private credit firms offering rates below those available in the volatility-lashed public markets.

Other companies are skipping the bond market altogether, opting instead to pay down debt while interest rates are elevated. Cruiseline operator Carnival Corp. plans to use its available liquidity to pay down the roughly $4.5 billion in debt it has coming due later this year and next instead of coming to the high-yield market.

Carnival CFO Plans to Skip Bond Market as Rates Soar

Credit upgrades to investment grade — so-called rising stars like Nokia Oyj — has also been a reason for the shrinking high-yield market.

A smaller universe means less supply to go around to investors that are eager to put money to work in high-yield debt. Funds that invest in US corporate bonds saw additions of $5.6 billion in the week ended April 5, including the largest inflow into high-yield funds in nearly six months, according to Refinitiv Lipper data.

Drive Down Yields

For companies that continue to issue junk bonds, a smaller market could eventually reduce the cost of the debt.

“You have the same amount of capital chasing the same assets, so they will bid up the price” and drive down yields, Citigroup Inc. analyst Michael Anderson said.

To be sure, the high yield market is still much bigger than it was before more than a decade of easy money flooded markets with cheap debt. And, if the drivers of new bond issuance pick up again, the shrinking trend could slow down or even reverse.

“I think the worst of it has passed,” Citi’s Anderson said, referring to the dwindling market. “In part because mergers and acquisitions and leverage buyout pipelines will eventually reopen, bringing more supply back.”

Others see the trend as a new era that will persist. “A smaller, nimbler market was always the ‘end game’ for credit after a decade of hubris,” Bank of America Corp. strategists including Barnaby Martin and Ioannis Angelakis wrote in a recent note to clients.