"FOMO" sentiment triggers a buying spree! The yield spread on US corporate bonds hits a new low in 27 years.

A key indicator of the valuation of American corporate bonds has soared to its highest level in nearly 30 years, as investors rush to lock in still-high yields, while there are also speculations in the market that the Federal Reserve will restart rate cuts next month. According to Bloomberg Index data, the extra yield that investors holding investment-grade corporate bonds instead of US Treasury bonds have gained has dropped to just 73 basis points on Friday, the lowest level since 1998. This decline indicates that bond prices have risen excessively high as investors lock in current rates, despite risks to companies from economic slowdown and the US trade war. Bond traders believe that the Federal Reserve will also take similar actions and could cut rates as soon as next month, as recent economic data shows inflation is in line with expectations, but the labor market is showing signs of weakness. After the Federal Reserve raised rates from near-zero levels to curb inflation following the pandemic, the average yield on high-grade bonds has remained above 5% for the past three years. This has greatly fueled demand, even in the face of economic and geopolitical uncertainties caused by Trump's tariffs, especially as demand from large institutional investors, insurance companies, and pension funds has helped stabilize risk premiums. However, some investors who suffered losses in the market crash caused by the Federal Reserve's significant rate hikes in 2022 have been cautious. As of the end of June, Janus Henderson managed $2 trillion in assets. But now, some investors are flocking to make purchases due to fears of missing out on enticing yields. Brill remarked in an interview, "Many young people are starting to worry about the fear of missing out." He was referring to the psychology of FOMO, where people are afraid of missing opportunities. These returns have been what people have been expecting for years. JPMorgan credit strategists Eric Beinstein and Nathaniel Rosenbaum wrote in a report on August 12 that this demand is driving record inflows into investment-grade bond funds. They pointed out that when the Fed cuts interest rates (which pushes up the prices of existing bonds), inflows usually increase; whereas when the central bank raises rates, inflows tend to reverse. This analysis is based on their observations since 2018. The analysts wrote, "These trends suggest that we may be entering a period of massive inflows, and the potential for the Fed to cut rates at the next three Federal Open Market Committee meetings in 2025 has largely been absorbed by the market." Strong inflows contrast sharply with lower net supply, providing another layer of support for the market. Because companies have temporarily stopped issuing bonds due to expectations of falling rates. JPMorgan expects that after deducting $710 billion in maturing bonds and $350 billion in bond interest expected in August, the net supply of bonds will see negative growth for the third consecutive month. Mark Clegg, a senior fixed-income trader at AXA Global Investment Corporation, said that due to reduced primary market supply in the summer, the bonds offered by dealers are not enough to meet the demand of investors. Clegg said, "As spreads have narrowed across all credit ratings, finding smart trading opportunities is harder than finding a parking space in a Costco parking lot early on a Saturday morning." The declining spreads in the corporate bond market have raised questions about whether investors have become too complacent about the risks of a downturn in the economy leading to rising default rates. Bloomberg Intelligence analyst Noel Hebert expects this figure to rise to about 93 basis points, about a quarter higher than the current spread level, which reached 119 basis points in April due to the threat of tariffs. Hebert said, "Part of this difference is due to people's overconfidence in pricing risk, perhaps because investors are confused by the total return, or for some other reason." UBS strategist Matthew Mish and his team also expressed similar concerns, stating that the market has not fully taken into account the related risks and they expect spreads to widen further with labor market weakness, Fed rate cuts, and falling yields. Nevertheless, the decline in yields will also increase the prices of existing bonds, prompting investors to pay less attention to spread levels. Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, said, "The summer compression phenomenon has fully emerged, the spreads of investment-grade bonds have recovered all the widening seen in April, as the worst tariff risks have faded away."