High base rates driving high credit demand
High interest rates are creating excellent credit markets for issuers and investors.
Credit spreads are trading close to multi-decade tight levels, and issuers have been able to sell large new issues into the markets with highly oversubscribed order books.
Treasury rates much higher than the last few years
Much of this is because of higher investor demand created by higher interest rates. 10-year Treasury rates are now at 4.5% – around their highest levels since 2007. And 30-year Treasury rates are now at 5% – also around their highest levels in 20 years.
For context, 10-year yields have been around 2% for much of the last decade and 30-year yields have been around 3% for much of the last decade.
5-year Treasuries are around 4.2% (having been around 1.5% for much of the last decade).
Investors focused on yields rather than spreads
This allows investors to lock in seemingly high yields on corporate bonds even at low credit spreads – purely because the Treasury benchmarks off which they price are at high levels.
This is particularly interesting for many investors who do not need to mark-to-market like many insurance companies, pension funds, and individuals – who are able to buy long-dated paper, high-grade bonds and see the 5%+ yield that they expect to earn as excellent.
Excellent opportunity for issuers and investors
There is a good chance that this excellent market continues for a material amount of time – but there are also risks that it falls away. For example, if inflation starts to pick up meaningfully, these “high” nominal yields might start to look less attractive. For example if inflation continues to run at around 4% (as with the latest CPI print) – then the real yield an investor receives could become very low; and if inflation picks up to high single digits again or to low double digits for a material amount of time, yields may need to increase materially to keep real yields positive.
Goldilocks conditions
For issuers and investors, these current goldilocks conditions where the market might be highly positive because of historically high rates but might not be pricing in the risks of higher inflation – potentially offer an excellent opportunity to issue new credit to secure their funding needs or to de-risk their portfolios.
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