Back to school, back to supply: corporate credit spreads at historic lows, what’s next?
Neil Sun, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses where he sees potential opportunities for selective investment, given today’s market dynamics.
Key points:
- Corporate bond spreads are near historic lows (~80 basis points over Treasuries) due to strong demand outweighing supply, driven by attractive yields despite slim risk compensation.
- September is expected to see significant new investment-grade corporate bond issuance, potentially testing the market's ability to absorb the supply without widening spreads.
- While long-term economic and policy conditions support a bullish credit stance, tight valuations and heavy near-term issuance may lead to some spread widening, offering opportunities for selective re-engagement.
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Welcome back to The Weekly Fix. My name is Neil Sun.
After a peaceful summer grind, corporate bond spreads are now sitting near the tightest levels since the late 90s – right around 80 basis points over Treasuries for investment-grade credit. That’s incredibly slim compensation for risk, especially when you consider the heavy supply ahead. Let’s unpack what this really means for bond investors today.
Why spreads are so tight now? This isn’t about risk disappearing, it’s about demand overwhelming supply. Investment grade bond funds have seen steady inflows, even with spreads grinding tighter. Why? Because yields are still attractive. Investors can lock in 5% or better in many high-quality names, and that all-in yield matters more right now than the incremental spread cushion. So, in short, yield buyers are still driving the market.
But here’s where it gets interesting: September is historically the busiest issuance month of the year. Expectations are for $130bn to $150bn in new IG corporate supply as companies rush to fund before year-end. That number nearly doubles a typical summer month.
With spreads already at historic tights, the key question is whether the market can digest all that paper without much repricing. If demand keeps up, spreads could remain contained. But if the pace of deals begins to overwhelm buyers, we may see some widening, and that could be the first real test of just how durable this demand really is.
Now, from an investment perspective, we remain constructive on the overall US economy and the bond market. Policy direction is now clearer, and looking ahead to 2026, favorable corporate regulation and anticipated tax cuts should provide additional boost to growth. This backdrop supports our longer-term bullish stance on credit.
In the near term, however, valuations are really tight, and September’s heavy corporate supply could create pressure on spreads. While the overall picture remains positive, some near-term widening should be expected before markets stabilize.
The bottom line is corporate spreads are at historical tight levels, reflecting real confidence in the US economy. But with a heavy supply calendar in September, we will soon find out how much demand is left at these valuations. We continue to focus on credit selection and stand ready for any potential spread weakness to re-engage with the market to generate alpha.
Thank you again for watching.
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