Current Landscape of US Corporate Investment Grade Bonds

In the current financial arena, corporate investment grade bonds in the United States may not evoke fervor, but perhaps that’s a silver lining. I perceive them as a resilient asset class, which I regard as a favorable indication rather than a drawback. Amidst persistent apprehensions about the trajectory of US economic growth, the bond spreads have intriguingly remained consistent. Should investors hit the panic button over this stability?

Geopolitical Tensions Amplifying Financial Uncertainties

This year has been significantly shaped by the fluctuating tariff landscape of the United States, yet a stark reminder surfaced recently—the geopolitical risks are very much alive. After an Israeli offensive targeting Iranian facilities related to its nuclear endeavors, tensions flared as Iran retaliated, prompting a typical market reaction on June 13, 2025: risk assets dipped while energy commodities and precious metals experienced a surge. That day also saw a slight downturn in fixed income assets, except for Chinese and Japanese government and corporate bonds when assessed in local currencies. Although things have slightly steadied, the atmosphere still feels precarious.

Inflation Concerns Looming Amid Economic Indicators

One of my lingering worries is the potential resurgence of inflation, despite a surprisingly low reading of the US consumer price index (CPI) reported on June 11, 2025. The United States stands out as a striking instance where fixed income yields are under the influence of conflicting economic forces. On one hand, concerns about fiscal sustainability are nudging yields higher; on the other, fears of an impending economic slowdown are dragging them down. This unusual tug-of-war has led to US government bonds outperforming investment-grade assets so far this year, despite stable macro indicators. This scenario partly clarifies why the yield spreads between these two asset types remain near cyclical lows. Could we face a significant widening of these spreads if the US economy falters under the weight of elevated tariffs?

Drawing Parallels to Economic History

Previously, I have posited that our current economic climate might bear more resemblance to the 1990s than the 1980s or 2010s. While I don’t anticipate growth rates akin to that era, I believe the US CPI inflation will likely stay within what the Federal Reserve deems "acceptable," even with the possible repercussions of heightened tariffs. If the uncertainty surrounding policy does not spiral into a severe recession, it seems reasonable to expect a period of stable economic growth and interest rates akin to that experienced during this cycle.

Evaluating the Historical Context of Current Spreads

If we extend our analysis to the entire period prior to the Global Financial Crisis (GFC), specifically from January 1, 1986, to December 31, 2007, we find that the current spread of 119 basis points aligns with the long-term average. This calculation leverages the redemption yield from the Intercontinental Exchange (ICE) Bank of America (BofA) US Corporate Index and compares it with the yield from the Datastream US Benchmark 10-year Government Bond Index as of June 20, 2025. Notably, during this previous period, spreads only exceeded 150 basis points once—during the crash of the tech bubble in 2002. Therefore, today’s spreads appear surprisingly low in the post-GFC era, largely due to our habituation to suppressed 10-year Treasury yields resulting from Quantitative Easing (QE).