Credit markets in the United States have tightened to levels not seen in more than two decades, with the premium that investment-grade companies pay to borrow above government bonds falling to its lowest since 1998. The rally has sparked warnings from investors who argue markets are underestimating risks to the global economy.
According to Financial Times reporting, the average spread between investment-grade U.S. corporate bonds and Treasuries dropped to 0.75 percentage points late last week, while Eurozone equivalents hit 0.76 points — the lowest since 2018. The figures, based on ICE BofA data, underscore how aggressively credit markets have rallied alongside record highs in equities.
Optimism has been fueled by a series of U.S. trade agreements with partners including the EU, Japan, and the UK, easing fears of a global trade war. Falling tensions have boosted corporate borrowing conditions even as U.S. tariffs rise to their highest levels since the 1930s.
Yet investors caution that the exuberance may be misplaced. “The credit markets are again weirdly confident that the global economy is going to be just fine, and I don’t know why they are as confident as they are,” said Ben Inker, co-head of asset allocation at GMO. “You just don’t seem to be getting paid that much for taking risk.”
Some analysts point to a growing disconnect between credit and rates markets. While credit spreads suggest little concern about growth or default risk, interest-rate markets are signaling caution, with traders pricing in five quarter-point Federal Reserve cuts by the end of next year. “The credit market is telling you there is no growth issue, the rates market is telling you that there is a little bit of concern,” said David Zahn, head of European fixed income at Franklin Templeton.
Goldman Sachs analysts recently noted that U.S. and European credit markets had “largely shrugged off” diverging growth prospects, instead moving in a “highly correlated” rally.
Corporate America has seized on the favorable conditions. U.S. companies have issued $910 billion in highly rated debt so far this year, the second-largest total for the first half of any year on record.
Still, uncertainty lingers. Credit spreads widened earlier this year after former President Donald Trump announced sweeping new tariffs, which rattled investors before subsequent trade deals helped calm markets. With U.S. jobs growth weakening and inflation data closely watched, some investors worry that optimism in credit markets could prove premature.
