Corporate bond spreads hit new post 2008 low despite debt boom, inflation concerns – MarketWatch

Spreads in the biggest part of the roughly $10.7 trillion U.S. corporate bond market hit a post-2008 financial crisis low on Wednesday.

The trend signals the willingness among investors to finance U.S. companies with investment-grade ratings, while getting paid less, despite the record borrowing spree initiated by big businesses in the years since the global financial crisis.

This week, spreads, or the level of compensation investors received on bonds relative to a risk-free benchmark, fell to a post-2008 low of 89 basis points above Treasurys TMUBMUSD10Y, 1.516% on the ICE BofA US Corporate bond index.

High-yield, or “junk bonds” issued by riskier U.S. companies have trailed not far behind the lows, on a spread basis, over the same stretch.

“We know the economic backdrop is strong,” a team led by Erin Lyons, co-head of U.S. investment-grade research at CreditSights, wrote in a note Wednesday.

Investment-grade companies “are proving they can make it through COVID headwinds, and many are remaining conservative when it comes to their balance sheets,” Lyons’ team wrote, adding that with the global hunt for yield, “it seems investors will take some spread” over Treasurys, “even in light of rising inflation and potential revaluation of their bonds.”

Investors are eager to hear more from Federal Reserve officials Wednesday about the recent spike in U.S. inflation and how that may impact its easy-monetary policy stance as the economy recovers from the pandemic.

Check out: Taper tantrum after the Federal Reserve update? Chairman Jerome Powell’s stock-market record is poor

This chart shows the downward drift in U.S. investment-grade corporate bonds spreads since 2008, at least until the onset of the COVID pandemic in March 2020, which sparked global shutdowns designed to halt infections.

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Sinking bond spreads

CreditSights

The smaller U.S. high-yield, or “junk bond,” segment of the corporate bond market this week also wa not far behind its post-2008 record, nearing about 317 basis points above Treasurys, or just 1 basis point above its Oct. 3. 2018, reading, according to BofA Global data.

The forecast from BofA’s credit strategy team, led by Hans Mikkelsen, is for spreads in the high-yield segment to narrow further to 300 basis points above the risk-free rate, given the sector’s “higher exposure to the red-hot U.S. economy.”

The team’s forecast for investment-grade spreads was for a move higher to 125 basis points.

U.S. stocks headed lower Wednesday ahead of the Fed update, with the Dow Jones Industrial Average DJIA, -0.65% down 100 points, the S&P 500 Index SPX, -0.59% off 9 points and the Nasdaq Composite Index COMP, -0.54% flipping negative in afternoon trade.