(Bloomberg) -- 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.
To kick off the final week of November, Citibank NA brought a bank-level debt offering totaling $2.5 billion on Monday, while other investment-grade issuers like Home Depot Inc. and Blue Owl Credit Income Corp. debuted deals to help pay down existing debt. Scientific instruments maker Thermo Fisher Scientific Inc. and a few Yankee banks, including France’s BNP Paribas SA, sold debt this week too.
The desire to own investment-grade debt has also been evident in the primary market with oversubscribed books and smaller new issue concessions. The spread on the Markit CDX North America Investment Grade Index, a measure of perceived credit risk for high-grade debt, also fell to the lowest since February 2022 earlier on Thursday. The precipitous drop to 62 basis points from nearly 82 basis points on Oct. 27 highlights dimming investor fears around credit defaults, as well as the fortitude of corporate balance sheets.
Next month, US investment-grade debt issuance is estimated to range between $30 billion and $35 billion, with the bulk anticipated to come in the first week of December.
Looking even further ahead, both JPMorgan Chase & Co. and Morgan Stanley expect US high-grade spreads to finish 2024 at 125 basis points. Meanwhile, spreads on speculative-grade bonds dropped eight basis points lower to 375 basis points on Wednesday — the lowest since September — while the average price on leveraged loans has reached 95.27 cents on the dollar.
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