(Bloomberg) -- Tight spreads may be obscuring corporations’ high borrowing costs and strained debt sustainability, marking signs of a possible bubble in US credit, according to a report from S&P Global Ratings.
Investment-grade spreads, at 78 basis points as of Friday, are hovering around their lowest point since 1998, according to data compiled by Bloomberg. High-yield spreads recently approached 2007 levels before rising again to 266 basis points on Friday.
Those spreads have approached lows in spite of elevated interest rates for more than two years, diminished expectations for rate cuts and “growing uncertainty ahead,” analysts including Nick Kraemer said in the report. “This aggressive pricing may also be interpreted as the first signs of a ‘bubble,’” the note said.
Still, continued growth tied to corporate earnings and the overall US economy offer reassurance that the credit market remains on steady footing.
More credit upgrades than downgrades have occurred since the Federal Reserve started its rate-hike cycle in 2022, with a “slower pace of downgrades” likely in the future. And while corporate yields are high, Treasury yields have risen more.
“Current market pricing may indeed be rich, but it is not completely unfounded given many supportive fundamentals,” according to the note. S&P said it’s not expecting any “sharp” widening of spreads in the near-term, though President-elect Donald Trump’s plan to raise tariffs could pose a “potential hiccup” to falling inflation and interest rates.
(Updates with information about interest rates in third paragraph. A previous version corrected the date of high-yield spread data and information about the Fed’s rate cycle.)
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