(Bloomberg) — Credit investors enticed by high yields are buying up corporate bonds, shrugging off the lingering Middle East conflict and focusing instead on robust results from blue-chip businesses.
Risk premiums on US investment-grade bonds on Thursday fell to their lowest level since early February. High-grade bond funds in late April and early May saw the most inflows since September 2020. And one borrower this week, Gilead Sciences Inc., sold longer-dated debt at a yield below that of its existing debt, signaling an unusually high level of demand.
That appetite is allowing corporate bonds to outperform US government debt, which has sold off this week amid growing inflation concerns. On Friday, the 10-year Treasury yield reached its highest level in about a year.
While the Iran war has stirred volatility across asset classes, corporate credit is looking like one of the safest bets as strong earnings results roll in and the AI revolution has investors optimistic about profitability. In contrast, higher oil prices are adding pressure on central banks in highly indebted countries to raise interest rates.
“You have the government balance sheet that’s deteriorated over time, and you have corporate balance sheets that, in a lot of cases, have been improving and remain strong and stable,” said Kelly Kowalski, head of investment strategy at MassMutual.
“For this narrative to shift, you would have to get to a point where the rise in yields causes fundamental economic damage,” she added. But, for now, “I think this is when the yield buyers come in and people start to think about extending duration.”
Still, a sustained period of high energy prices could pose a risk to corporate margins, according to Al Cattermole, portfolio manager at Mirabaud Asset Management.
“I think spreads are pricing in no negative growth impact from the Iran war,” which is “possibly an oversight,” he said.
It’s also not clear how long demand will persist. Credit spreads have been narrowing and credit default swap prices have broadly been falling in recent weeks, but both metrics showed signs of weakening on Friday.
Even as the Iran war disrupts oil flows and clouds economic forecasts, investors enticed by juicy returns are continuing to snap up newly-issued bonds and those in the secondary market.
“This disconnect between apparently serene spread levels and elevated underlying volatility has, in our view, been sustained by higher all-in yields, which continue to underpin demand,” Soren Willemann, credit strategist at Barclays Plc, wrote in a note to clients on Friday.
Investors poured another $4 billion into short- and intermediate-term investment-grade bond funds in the week ended May 13, after roughly $6.9 billion the previous week — the largest weekly inflow since September 2020 — according to LSEG Lipper data.
Yields are being pushed up by a recent selloff in government debt as traders price in rate hikes by the world’s major central banks.
The Federal Reserve is expected to boost its policy rate by March 2027, and both the European Central Bank and the Bank of England are forecast to raise rates three times by then to tackle inflationary pressures as oil prices rise.
Meanwhile, appetite for new issues has held up. On Thursday, each offering of new investment-grade corporate bonds in the US attracted orders of about four times the amount eventually sold, based on data compiled by Bloomberg. That’s on par with demand levels recorded earlier in the year and in 2025.
The US leveraged loans market had its busiest week since January, Bloomberg-compiled data show, with $35 billion of deals pricing and some offerings being upsized.
European junk bond markets have also been on a tear, with €42.6 billion raised year-to-date, the most since 2021, according to Bloomberg-compiled data. Meanwhile, a key gauge of European credit risk has dropped to pre-Iran war levels.
Strong corporate earnings are supporting investors’ bullish views. Among US companies, earnings beat estimates by more than 13% in the first quarter, according to data compiled by Bloomberg. In Europe, they surprised by 5%.
“One of the main pillars of the resilient performance of the credit markets over the past few years has been the solid fundamentals and we note that leverage remains healthy for now,” Societe Generale credit strategist Juan Valencia wrote in a report this week.
–With assistance from Abhinav Ramnarayan, Abraham Gonzalez, Rachel Graf and Jeannine Amodeo.
(Updates with inflow data in paragraph 12.)
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