(Bloomberg) -- US investment-grade corporate bond spreads have narrowed to the lowest level in more than three years, a clear sign of just how bullish credit investors are even as macro and geopolitical risks mount.
Average high-grade bond spreads — the added premium over US Treasuries that investors get paid to hold riskier debt — narrowed four basis points to 83 at Friday’s close, the tightest level since September 2021, according to data compiled by Bloomberg.
Investors fleeing bonds have been initially selling Treasuries, and hanging onto corporates, which along with the Federal Reserve’s expected rate cuts and a slowdown in company bond issuance are helping to keep the spreads tight.
That’s in contrast to the rise in volatility measures including the VIX Index — a measure of Wall Street fear — and a blowout payrolls report Friday, “reflecting a market perhaps reluctant to reprice,” according to Bloomberg Intelligence analysts Noel Hebert and Sam Geier.
“Despite the myriad economic, political and geopolitical uncertainties, the asset class has been sustained by a persistent duration bid amid expectations for loosening monetary policy and lower yields,” the BI analysts wrote in a note on Monday.
The strong jobs data Friday undercut chances for another big interest-rate reduction, sending the 10-year US Treasury yield back to 4%, a level last seen in August. All-in high-grade yields rose to 4.88% on Friday, the highest since Sept. 3, which should also boost demand for the asset class.
Related: Corporate Debt Gains an Edge Over Stocks as Fed Cuts: MLIV Pulse
To be sure, spreads could still widen in the coming days as corporate debt often takes a few days to catch up with a Treasuries selloff. For example, when Treasuries rallied in early August as softening US employment data fueled speculation of aggressive interest-rate cuts, corporate bond spreads widened before narrowing the following week.
“Investors are more concerned with declining cash yields than the level of credit spreads,” said Noah Wise, senior portfolio manager for the Plus Fixed Income team at Allspring Global Investments. “That is providing support to the corporate credit market, despite valuations hitting levels we haven’t seen in over three years.”
(Updates with Treasuries details in seventh paragraph, Noah Wise quote in final paragraph)
©2024 Bloomberg L.P.