The appetite for corporate bonds of all calibers has increased. The yields of 5% to 6% available in the so-called investment-grade corporate market remain attractive enough for global investors even if the investment now requires hedging the risk of a volatile dollar.
Despite uncertainty caused by changing economic policies, this investor interest is providing a tailwind for the economy.
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Not only has the risk premium of investment-grade corporate bonds shrunk compared with Treasury bonds, but so has the premium required in the far-riskier high-yield bond market.
Investing in the high-yield bond market has come a long way from the junk bonds in the 1980s. Default rates are shrinking by most reports and the $1.7 trillion high-yield market, now yielding 6.6%, has become as attractive for issuers as it is for investors.
That’s not to say that the high-yield market is immune to macroeconomic shocks, the main driver of risk.
In fact, high-yield bonds remain prone to higher spikes than traditional investment-grade bonds. This can be seen during the pandemic of 2020, the inflation shock of 2022, and briefly during rollout of tariffs this past spring.
For now, though, we expect the economy to reaccelerate through next year, driven in part by the full expensing of capital investments.
