© Reuters. A packet of former U.S. President Abraham Lincoln five-dollar bill currency is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron/File Photo
By Amy Stinson and Marco Rossi
(Reuters) – The gap between the yields of investment-grade and speculative-grade corporate bonds compared to U.S. Treasuries has shrunk to its smallest point in over two years, reflecting an increase in overall investor optimism.
The spread on the ICE BofA U.S. Corporate Index, a widely-used indicator for high-quality debt, fell to 93 basis points on Thursday, reaching its lowest level since November 2021.
Similarly, on the ICE BofA U.S. High Yield Index, which measures junk bonds, the option adjusted spread decreased to 322 basis points, the lowest it has been since January 2022.
These spreads indicate the additional yield that investors request to hold corporate bonds over Treasury notes and bonds, which are deemed the most secure financial instruments due to the minimal risk of default by the U.S. government.
“The extra return you receive compared to risk-free assets is minimal,” noted Anthony Woodside, head of U.S. fixed income strategy at LGIMA. Nevertheless, he emphasized that “investors are looking at overall yields.”
Spreads serve as a barometer of market confidence. The robust demand for junk bonds, in particular, signals optimism, with diminishing spreads suggesting that investors perceive financial conditions as robust and are less concerned about the possibility of corporate defaults.
In March 2020, the junk spread skyrocketed to over 1,000 basis points as the onset of the COVID-19 crisis triggered market turmoil.
While the High Yield Index is approaching a historical peak established earlier this month, the ICE BofA U.S. Investment Grade corporate bond index dropped to a two-month low last week.
The current market positivity is propelled by an unparalleled surge on Wall Street and a surprisingly resilient economy, which have boosted Treasury yields this year.
In the week leading up to Wednesday, as the market hit record highs, investors allocated $15.2 billion into bonds, including $10.2 billion into investment-grade bond funds. This marked the 16th consecutive week of inflows, the lengthiest stretch since October 2021, as reported by Bank of America Global Research on Friday. Read More