US corporate bond spreads rally to three-year low, bucking risks

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 the close last Friday (Oct 4). This marks the tightest level since September 2021, Bloomberg data showed.

Strong demand from investors fleeing from US Treasuries into short and intermediate investment-grade bonds, the US Federal Reserve’s expected rate cuts and a slowdown in bond issuance are all helping keep the spreads tight.

This is in contrast to the rise in volatility measures including the Cboe Volatility Index – a measure of Wall Street fear – and a payrolls report on Friday.

This reflects “a market perhaps reluctant to reprice”, said 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,” they said on Monday.

SEE ALSO

Key US Treasury yields hit 4% for first time since August on Federal Reserve rethink

The strong jobs data on Friday undercut chances for another big interest-rate reduction, sending the 10-year US Treasury yield back to 4 per cent, a level last seen in August.

All-in high-grade yields rose to 4.88 per cent on Friday, the highest since Sep 3, which should also boost demand for the asset class. BLOOMBERG