Key Takeaways:
Tight credit spreads in the US corporate bond market, holding near their lowest levels since the late 1990s, show investors are more focused on the structural support from a $1.17 trillion federal deficit than on geopolitical or technological risks.
"My base case is that US corporate credit spreads stay tight on a structural basis thanks to the widening of the US budget deficit,” Tan Kai Xian, an analyst at Gavekal, wrote in a recent note.
High-quality corporate bonds are offering an average of just 0.81% in additional yield over comparable Treasuries. This resilience comes even as the market quickly shrugged off recent conflict involving Iran, with spreads returning to pre-war levels in just 15 days, compared to a nine-day recovery for the stock market.
The dynamic suggests that as long as wide government deficits continue to pump money into the economy and bolster corporate profits, credit markets may overlook traditional risks. This creates a stable but low-yield environment for investors, where credit risk is potentially mispriced due to a dependency on continued government spending for market stability.
The composure in the credit market indicates that fears of spillover from private credit or anxiety over artificial intelligence disrupting businesses have not materialized in debt markets. Manish Kabra, a multi-asset strategist at Société Générale, noted that corporate bond spreads have “moved into damage‑contained mode—signaling a pivot from second‑order fears and back to fundamentals.”
The core fundamental is the health of US corporations. Total after-tax profits for U.S. corporations climbed to $3.79 trillion by the end of 2025, a 104% increase from the lows seen during the Covid-19 pandemic, according to Federal Reserve data. Healthier companies with stronger balance sheets can offer lower yields on their debt, contributing directly to tighter spreads.
"The expansion of US budget deficits, which has seen the government buy more goods and services, is largely responsible for this healthy profits situation,” according to Gavekal's Xian.
The federal deficit for fiscal 2026, which began in October, has already reached $1.17 trillion. While slightly below the $1.307 trillion from the same period in fiscal 2025, long-term projections show deficits remaining elevated. The Committee for a Responsible Federal Budget projected in February that annual deficits will average $2.4 trillion between 2027 and 2036. For investors, this implies that the powerful force suppressing credit risk is not expected to fade, making corporate bonds a stable, albeit low-return, investment for the foreseeable future.
This article is for informational purposes only and does not constitute investment advice.
