US Corporate Credit Spreads Hold Near All-Time Low
The yield premium for US high-grade corporate bonds over Treasuries sits at 78 basis points. This level represents an all-time low for the spread. In contrast, the 10-year Treasury yield recently surpassed 5 percent. This marks the highest level since 2007.
US high-grade corporate credit spreads have stabilized at 78 basis points over Treasuries. This figure is near an all-time low according to ICE BofA indices. The 10-year Treasury yield, however, rose above 5 percent last week. This is the highest level recorded since 2007. Government bonds are on track for their worst year since 2022. Central banks have raised interest rates to combat inflation. The US-Iran conflict has also pushed energy prices higher. These factors have hurt the performance of sovereign debt.
Investors have moved sharply into corporate debt despite rising rates. More than US$380 billion flowed into high-grade debt funds as of September 9. This inflow equals 7.5 percent of the industry's total assets under management. Bank of America reported these figures. The market absorbed a record wave of US hyperscaler issuance. These tech giants issued US$220 billion in bonds this year to fund AI ambitions. BNP Paribas confirmed this volume. Analysts expected this supply to raise financing costs for all issuers. That broader weakness has not materialized.
Corporate Fundamentals Remain Solid
Traders note that corporate bonds offer better volatility-adjusted returns than government debt. Sanjay Jhamna, global head of credit trading at JP Morgan, stated that credit is the asset class of the moment. He noted that government bonds carry significant fiscal and inflation risks. Corporate bonds are easier to invest in by comparison. Nachu Chockalingam, head of London credit at Federated Hermes, said corporate fundamentals remain solid. He noted that the market does not worry about imminent downgrade or default risks. Primary issuance continues to be absorbed by buyers. Insurance companies and pension funds remain active participants in this market.
The Federal Reserve raised interest rates for the first time in three years on Wednesday. The central bank signaled it has more work to do to tame inflation. The 10-year Treasury yield climbed from less than 4 percent in late February to 4.99 percent on Friday. This increase did not significantly impact corporate credit spreads. In 2022, high-grade credit spreads widened by about 75 basis points. That occurred when Treasury yields jumped more than 250 basis points. The current divergence highlights a break from historical correlation.
Sovereign Debt Faces Structural Headwinds
Analysts cite differing balance sheet conditions as the driver of this split. Corporate balance sheets generally remain sound. Economists question the trajectory of sovereign debt loads. Governments in the developed world have made little effort to rein in spending. Fiscal deficits are running at levels rarely seen outside of crises. Large buyers in the market have also stepped back. Central banks are unwinding extraordinary monetary policies from the previous decade.
The Federal Reserve owns 13.8 percent of the Treasury market. This is down from 26.4 percent in late 2021. A July paper from Morgan Stanley provided this data. This reduction in central bank demand contributes to the pressure on government bonds. GN auto markets/bonds: bond yields reports indicate that this structural shift favors corporate credit. The contrast between the two asset classes is stark. Corporate debt is resilient while sovereign debt struggles. Investors are taking sharply different views of risk in these two corners of the market.
