As the Fed Raises Rates, Worries Grow About Corporate Bonds

Another is Bed Bath & Beyond, which has struggled to compete with online retailers and to keep ahead of changing consumer tastes. That retail chain is projected to closed about 150 of its stores and cut 20 percent of its corporate and supply chain staff. It has a debt of more than $1 billion. On Wednesday, the company said it had reached a deal with some investors to convert a portion of its debt into shares.

Executives at both companies have said that their turnaround plans are working.

Heyward Donigan, the chief executive of Rite Aid, has emphasized “good progress on key initiatives,” including a rising number of prescriptions filled and a reduction in some expenses. And Sue Gove, the chief executive of Bed Bath & Beyond, said in a recent statement that the company was “confident that our current liquidity will enable the necessary changes we are implementing.”

There are other signs of stress. After a sharp increase during the pandemic, the number of new businesses being established in the United States has plateaued this year. The housing market has slowed sharply and some companies like Meta and Twitter are laying off thousands of workers.

If the Fed keeps raising rates and weaker companies begin to fail or struggle, relatively healthy companies could find it harder to borrow money because investors will begin to worry who will be hit next. Even if the number of failures is relatively small, it “can have a cascading effect,” said Joe Quinlan, the head of market strategy for global wealth and investment management at Bank of America.

“The herd gets moving in one direction and that can create its own problems,” Mr. Quinlan said.

Still, many Wall Street analysts said they were not worried, pointing to a variety of indicators that they said showed businesses getting through the next year or two mostly unscathed.

The New York Federal Reserve compiles a Corporate Bond Market Distress Index that aims to measure the overall health of the market, with a higher number suggesting more distress. The index is currently at its highest level since late 2020, but it is far below where it was early in the pandemic and during the 2008 financial crisis.

Analysts who believe that businesses will be mostly fine note that U.S. households overall have only used up about one-quarter of the $2.3 trillion in extra savings they accumulated during the pandemic, which suggests that demand for goods and services should stay robust. Also, many companies have a lot of cash on hand from when the economy was stronger and interest rates were lower, which should reduce or eliminate their need to borrow money for the next couple of years.