Blue-Chip Spreads Rally as Investors Bet Fed is Done Hiking
Risk premiums on US investment-grade corporate bonds have narrowed to the tightest level in nearly two years on expectations that the Federal Reserve has reached the peak of its monetary-tightening cycle.
The figure, which measures the extra yield investors demand to own corporate bonds instead of US Treasuries, is at the lowest level since February 2022, according to data compiled by Bloomberg. High-grade spreads stood at 107 basis points on Wednesday, having fallen two basis points from the prior session, Bloomberg index data shows.
On Nov. 24, spreads scraped the lowest level since April 2022, fueled by wagers that the central bank’s policymakers are done raising interest-rates. The extended rally translates into lower funding costs for blue-chip borrowers looking to tap the primary market. Meanwhile, the average corporate yield-to-worst — the lowest possible yield that may be received without a security defaulting — has dropped to 5.56% from an Oct. 19 high of 6.43%, further bringing down the cost of raising fresh debt.
On Thursday, investors also took note of economic data which showed that US consumer spending, inflation and the labor market all cooled in recent weeks, adding to evidence that the economy is slowing, and reinforcing sentiment that the Fed’s tightening campaign is over.
With both spreads and yields ticking lower, borrowers took advantage of the inviting backdrop to issue just over $17 billion this week, in line with Wall Street estimates calling for $15 billion to $20 billion of sales. That’s helped boost November volume to a little over $98 billion, meeting expectations for $90 billion to $100 billion, and with one more session left in the month to reach the high-end of the range.
