(Bloomberg) — Junk debt is about as safe as investment-grade now, at least according to prices in credit markets.
The gap between risk premiums on the highest-rated US junk bonds and the lowest-rated investment-grade notes was hovering around 0.80 percentage point this week, not far from the lowest since 2019. As money managers brace for the Federal Reserve to start cutting rates, they’ve grown willing to accept lower and lower yields compared with government debt.
Risk premiums, or spreads, are tight across the corporate credit curve now as money managers pile into corporate debt. Investment-grade spreads are close to their tightest since the late 1990s, and the difference between many spread levels is close to the tightest on record, according to Bloomberg index data.
“Spreads are compressed everywhere. The market is really reacting to a lot of strength on the demand side,” said Stephanie Doyle, portfolio manager for investment grade corporate strategies at JPMorgan Asset Management.
Markets can underestimate risk, and sometimes severely. Spreads could blow out for a host of reasons now: A series of tariffs announced by US President Donald Trump pushed spreads wider in April, and geopolitical risk has hardly disappeared. US job growth cooled in August and the unemployment rate rose to the highest since 2021, a report said on Friday, potentially signaling economic trouble ahead.
But investors are piling into corporate bonds to lock in yields that are high by the standards of the last decade, and have been falling for most of this year. The average US high-grade bond yield was 4.8% on Thursday, well above the mean of 3.8% for the last decade but down from 5.3% at the start of 2025.
For now, money managers are happy to allow the market to climb the proverbial wall of worry. Company earnings are still relatively healthy. And investors have been pouring money into credit funds, fueling more demand than the supply can fill.
“Corporate and household balance sheets are healthier than average, maybe way healthier, so that justifies it a bit. But then there is all the geopolitical and macro headwinds,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. “It is the unrelenting technical of inflows driving it, and that is bubbly.”
Shannon is seeking safety in industries like utilities and telecoms to avoid potential market stress and deliver returns.
Investors’ drive for yield has been evident in the new issue bond market this week as sales returned after the summer slowdown. In the US, Australian mining company BHP Group Ltd. sold 30-year bonds this week at a spread of 0.83 percentage point, just 0.06 percentage point more than the 10-year spread in that offering. Generally, the gap between 10- and 30-year spreads this week reached some of their tightest levels on record, according to Bank of America.
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Still, in Europe there have been some signs of investor price sensitivity to strong tightening. French food company Danone SA saw orders for its hybrid bond drop from €4.2 billion ($4.9 billion) at the initial pricing stage to only €1.25 billion when finalized. Orders faded as the offering priced with a coupon of 3.95% and the tightest spread over senior debt for a corporate hybrid bond ever, just 67 basis points, according to a person familiar with the matter.
For now, many market watchers see more of the same coming. BNP Paribas strategists think US high-grade spreads could shrink to the 60 basis point range since the higher yields will continue to attract demand and can trade at that level before its extreme. On the question of why not just buy government bonds, “a common factor is that credit is generating strong returns and doesn’t appear to be very risky,” according to strategists led by Viktor Hjort.
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