Investors rush to buy debt before the Fed cuts rates further
by Josyana Joshua
A key measure of US corporate-bond valuations reached the most expensive level in nearly three decades as investors raced to lock in still-elevated yields following the Federal Reserve’s first interest rate cut since 2024.
Risk premiums on US investment-grade corporate bonds, or the extra yield above Treasuries that investors demand for owning higher-quality company debt, shrank to just 72 basis points Thursday, according to Bloomberg index data. That spread’s decline marked a new multi-decade low for the measure, which in August reached 73 basis points, the lowest since 1998.
The drop comes as investors rush to buy debt before the Fed cuts rates further. Even after the US central bank cut rates on Wednesday, bond yields remain high relative to levels of the last 15 years, and investors like insurance companies that tend to focus on yields still have an incentive to buy.
“Historically when you have coupons at the level where they are now it limits volatility,” according to Dominique Toublan, head of US credit strategy at Barclays Plc. “Demand continues to be robust, yield driven demand. Yields still continue to be at a level that yield focused investors are finding attractive.”
High-grade bond yields averaged 4.76% at Thursday’s close, compared with about 3.6% since 2010. For most of the last three years, they have averaged above 5%, after the Fed pushed up rates from near zero to quell the post-pandemic inflation surge. Relatively high yields have been a huge driver of demand for years from investors that also include pension plans, often looking to fund longer-term liabilities.
At the September Fed meeting, policymakers also updated their economic projections and now see two additional quarter-point cuts this year, one more than projected in June. They also foresee one quarter-point cut in 2026 and one in 2027. Those cuts may further weigh on yields, creating urgency for some investors.
As everything remains stable, the backdrop is ideal for spreads to remain tight, Toublan said. “It’s a combination of the stars lining up in some sense: fundamentals are solid, demand is solid and supply is not overwhelming everyone.”
Copyright Bloomberg News
