Preliminary Signs of Foam Emergence? Spreads on US Corporate Bonds Hit Historic Lows

Last week, the spread between investment-grade and high-yield corporate bonds in the United States fell to historic lows, a phenomenon that could be seen as an early sign of a bubble. According to a report by S&P Global Ratings on Monday, on November 12, the spread on investment-grade bonds narrowed to 82 basis points (compared to the premium on U.S. treasuries), while the spread on high-yield bonds narrowed to 214 basis points on November 14. S&P stated that this change is worth noting because interest rates in the United States have been at historical highs over the past two years due to the Federal Reserve's tightening cycle. "The current spread levels may obscure some of the pressures that companies face in terms of actual borrowing costs and debt sustainability," the report pointed out, "this aggressive pricing may also be interpreted as an early sign of a bubble." Although the market generally expects fewer rate cuts in the coming months than previously expected, and faces increasing uncertainty, the spreads continue to narrow. Currently, this trend is only limited to the United States. While bond spreads globally are generally declining, European spreads are still above historic lows, mainly due to the conflict between Russia and Ukraine, which has widened spreads in the region. However, there are other supporting factors in the credit market, and the narrowing of spreads may not necessarily be a sign of market complacency. The U.S. economy continues to grow strongly, with real GDP growth reaching 2.8% over the past four quarters. The Atlanta Fed expects the U.S. economy to grow by 2.5% in the fourth quarter of this year. Additionally, corporate profits in the U.S. remain strong, have been positive since 2021, and are expected to continue to grow until 2024. The S&P report noted: "Although corporate bond yields are at relatively high levels, the increase in benchmark government yields has been greater." For example, BBB-rated corporate bond yields have risen by 32 basis points, while B-rated corporate bond yields have decreased by 14 basis points. Meanwhile, the 10-year U.S. Treasury yield has risen by 58 basis points. Since the beginning of the Fed's rate hike cycle, the number of corporate ratings upgraded has exceeded the total number of ratings adjustments. The report suggests that even if there are some cases of spread widening in the future, spreads will still be close to historic lows in the short term, so a significant widening is unlikely. In conclusion, S&P stated, "While the improvement in credit quality supports the optimistic outlook for the bond market, potential disruptions may arise from potential increases in tariffs or a path to decreasing inflation and interest rates." As spreads approach historic lows, the development of the bond market will continue to be influenced by U.S. economic growth, corporate profits, and global geopolitical dynamics.