Junk Bonds Are the New High Grade Bonds

Risk in the corporate bond market is being priced unusually tight, with junk debt now trading at spreads not far from investment-grade levels. This week, the difference between yields on the highest-rated U.S. high-yield bonds and the lowest-rated investment-grade notes narrowed to just 0.80 percentage point close to its lowest level since 2019. With investors preparing for potential Federal Reserve rate cuts, many are settling for slimmer returns compared with Treasuries.

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Spreads have compressed across the entire credit spectrum as demand for corporate bonds strengthens. Investment-grade spreads are sitting near levels not seen since the late 1990s, while many different parts of the curve are at or close to record-tight levels, Bloomberg index data shows.

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“Spreads are compressed everywhere. The market is really reacting to strong demand,” noted Stephanie Doyle, portfolio manager for investment-grade corporate strategies at JPMorgan Asset Management.

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While today’s tight spreads reflect investor confidence, markets often underestimate risks. Credit conditions can deteriorate quickly. For example, spreads widened in April after former President Donald Trump announced tariffs, showing how geopolitical shocks can still rattle investors. U.S. labor data also points to potential vulnerabilities: job growth slowed in August, and unemployment rose to its highest level since 2021, raising concerns about the economy’s resilience.

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Despite those risks, inflows into corporate bonds continue as investors look to secure yields that remain attractive by historical standards. On Thursday, the average yield on U.S. investment-grade bonds was 4.8%. That’s well above the decade-long average of 3.8%, even if it has eased from 5.3% at the start of 2025.

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For now, managers appear willing to embrace the uncertainty. Corporate earnings remain relatively strong, and credit funds are attracting heavy inflows, boosting demand far beyond available supply.

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“Corporate and household balance sheets are healthier than average possibly much healthier which offers some justification,” said Gordon Shannon, portfolio manager at TwentyFour Asset Management. “But the relentless wave of inflows is driving this, and that feels bubbly.” Shannon is leaning toward safer sectors such as utilities and telecoms to help cushion portfolios against future shocks.

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The robust demand has been especially visible in the primary bond market as issuance ramps up after the summer lull. This week, BHP Group Ltd., the Australian mining giant, issued 30-year bonds at a spread of just 0.83 percentage point only 0.06 above the 10-year spread in the same offering.

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According to Bank of America, the gap between 10- and 30-year spreads reached some of its tightest levels on record.

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However, Europe is showing some cracks in investor enthusiasm. French food group Danone SA struggled to maintain demand for its hybrid bond. Initial orders of €4.2 billion ($4.9 billion) dropped sharply to €1.25 billion once pricing tightened.

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The bond, which carried a 3.95% coupon and the narrowest-ever spread over senior debt for a corporate hybrid at just 67 basis points, tested investors’ appetite for risk.

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Despite isolated pushback, strategists expect spreads to remain tight for now. Analysts at BNP Paribas believe U.S. investment-grade spreads could contract further into the 60-basis-point range, supported by higher-than-average yields and consistent demand.

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Many investors still prefer credit over government debt, seeing corporate bonds as a source of attractive returns with manageable risk.

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As BNP Paribas strategists led by Viktor Hjort put it, “Credit is generating strong returns and doesn’t appear to be very risky.”

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