Key Takeaways: High-grade US corporate bond yields hit 5.3%, the highest in about a year. The credit spread over Treasuries is near its narrowest since the 1990s. JPMorgan warns spreads may be entering overshoot territory as AI-related issuance surges.
Investors piling into corporate bonds for their 5.3% yields are getting the smallest compensation for credit risk in a generation.
An index of the highest-rated US corporate bonds hit a yield of 5.3% this past week, the highest in about a year, according to ICE BofA data. With the 10-year inflation break-even rate at roughly 2.4%, that implies inflation-adjusted returns approaching 3% over the next decade.
"We think it is likely spreads are now on the verge of entering overshoot territory," Nathaniel Rosenbaum, head of US high-grade credit strategy at JPMorgan Chase, said in a recent note.
The yield gap between investment-grade corporate bonds and Treasuries has collapsed as Treasury yields surged. That spread is hovering near its lowest level since the 1990s, according to the ICE BofA index. The narrowing reflects a market pricing near-perfect credit conditions — even as the underlying risk profile shifts.
The math behind the narrow spread
The compression is not entirely irrational. Worries about the US fiscal situation have pushed Treasury yields higher, while big US companies just reported their strongest earnings growth in years. Some corporate issuers even carry higher credit ratings than the US government: Microsoft is rated triple-A, with the US one notch below.
But the tight pricing leaves little margin for error. At today's narrow spreads, even a small repricing could produce outsized losses for bondholders.
One risk is the supply-demand balance. May issuance has slowed as higher yields raised borrowing costs, but analysts expect a surge of bond offerings tied to AI-related financing and a rebound in mergers and acquisitions. Credit strategists at Goldman Sachs forecast 2026 US investment-grade bond issuance will top $2 trillion.
If additional supply pushes spreads wider, that could attract more demand and cap the move. But more tech issuers also add credit risk to the market.
Hyperscaler leverage shifts the risk profile
Historically, the biggest AI builders have been among the least leveraged, most cash-rich companies. That is changing. The yield spread on an index of investment-grade hyperscaler debt has widened relative to the rest of the investment-grade market since the start of the year, according to data compiled by Lotfi Karoui, multiasset-credit strategist at Pimco.
"The market is demanding higher compensation against the risk this releveraging impulse gets more aggressive," Karoui said.
Another consideration is the shift toward longer-dated bonds. The jump in 30-year Treasury yields since late April has been only half as large as the move in 5-year yields, making longer maturities more attractive for issuers. But longer maturities lock buyers into fixed yields for decades, amplifying inflation risk. If consumer prices keep rising — fueled by elevated oil prices — spreads could widen at a faster pace.
For investors seeking 5% yields as a retirement anchor, today's levels may be attractive. But for those buying bonds as a hedge against equity drawdowns, paying near-perfection prices carries its own risk.
This article is for informational purposes only and does not constitute investment advice.
