Credit Investors Flash Optimism on Fed’s Soft-Landing Scenario

Credit investors are turning more optimistic that the Federal Reserve will pull inflation under control without shoving the US economy into a deep recession.

The extra yield money managers demand to hold blue-chip corporate bonds over similar Treasuries dropped Monday to the lowest in more than a year, according to data compiled by Bloomberg. It’s an indication that traders expect companies to manage their balance sheets, even in the face of tight monetary policy.

“It’s greater confidence in the US economic outlook and the probability of a soft landing — and a reduction in recession probabilities,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. “You see it across risk markets, whether in equities or high-yield spreads, as well as investment-grade spreads.”

Investors Push Credit Spreads Lower as Risks Recede

Wall Street analysts and investors have been closely monitoring the Fed’s fight against rising consumer prices, with some narrowing in on the odds of an interest-rate pause at the September gathering. Last week, US policymakers boosted rates, as expected, by 25 basis points as Chair Jerome Powell pledged a more data-dependent approach.

That — along with a string of positive economic indicators, including resilient GDP data — helped push high-grade bond spreads to just 112 basis points on Monday, the lowest since April 2022. The average risk premium on blue-chip debt has receded for eight sessions, the longest streak since October 2020.