(Bloomberg) -- Demand for US high-grade corporate bonds is getting “unusually strong,” raising the risk of a market overshoot as investors absorb a glut of supply, Bank of America Corp. said in a note this week. 

“The unusually supportive technicals currently are unlikely to be sustainable in the longer term,” strategists led by Yuri Seliger wrote in a note, describing conditions as “bubbly.” That may put pressure on risk premiums as the market continues to be inundated with new bond sales. 

So far, recent corporate borrowers have had no problem finding ready buyers for their bonds, and the market has powered ahead despite the wave of issuance. The difference in yield, or spread, between investment-grade bonds and risk-free Treasuries dropped one basis point overnight to trade at 91 basis points, or 0.91 percentage point, according to a Bloomberg index tracking the debt. That’s the tightest in more than six weeks, and well below the 10-year average of 1.25 percentage points. 

Corporations have issued more than $288 billion of debt this year, 20% higher than this time last year, according to data compiled by Bloomberg. That includes some $14 billion of sales on Tuesday alone.

Typically, the burst of supply would push spreads wider. But the relentless demand from retail buyers, pensions and annuity funds is not only keeping them contained but pushing them tighter. That could make investors piling into the asset class more vulnerable to losses in the near term. 

“The strength of the technicals continues to surprise with yesterday’s $14 billion of supply coming with little to no concession,” JPMorgan Chase & Co. strategists led by Eric Beinstein wrote in a separate note. “This fits into the consistent pattern of supply mapping to demand, and demand has been strong and is likely to remain strong.” 

Over the last seven weeks, inflows into high-grade funds have run at $6 billion a week on average, the strongest pace since February 2021, according JPMorgan.

Supply is expected to stay strong into March, according to Bank of America. Cisco Systems Inc. is selling bonds Wednesday to partly finance its proposed $28 billion acquisition of Splunk Inc. The sale comes after drugmaker Bristol Myers Squibb tapped the market last week to fund acquisitions of it own, meeting with a whopping $85 billion in demand for its $13 billion offering. Robert Schiffman, Bloomberg Intelligence strategist, says this could open M&A “floodgates.”

“With Broadcom, Microsoft and Hewlett Packard Enterprise waiting in the wings to extend M&A funding duration, billions more in tech bonds may soon be issued,” he wrote in a note Wednesday. 

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