(Bloomberg) — Credit investors who shrugged off an historic bout of global volatility this week are about to face a major test after yield premiums on US investment-grade corporate debt shrunk to their lowest in about three decades.
Spreads, or the extra yield above Treasuries that investors demand for owning the high-quality company debt, tightened to just 71 basis points, according to Bloomberg index data. That marks the lowest for the measure since 1998.
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With major tech companies needing trillions of dollars to fund their artificial-intelligence buildout plans, those levels may be fleeting, according to Hans Mikkelsen, a credit strategist at TD Securities Inc., who has a target of 95 basis points for US high-grade debt for 2026.
“The test of the market will be after Jan. 29 when the major tech companies begin reporting” earnings and exit blackouts, he said. “They could issue more bonds for AI spending than the market can absorb at these tight spread levels.”
Markets got a boost in recent days after US President Donald Trump said he wouldn’t use force to gain control of Greenland, and walked back threats to impose tariffs on European nations opposing his efforts to take possession of the island. Still, government bonds have been under pressure for much of the week, hurt by a steep, fiscally driven selloff in the Japanese debt market, and fears of the Greenland situation escalating.
Rising all-in yields for corporate bonds off volatility in rates attracted buyers this week, according to Mikkelsen. In credit’s favor, the economic environment looks “very favorable,” he added.
Meta Platforms Inc, (META) which raised $30 billion in a single debt sale in October, reports earnings next week. Chief Executive Officer Mark Zuckerberg has said the company will spend hundreds of billions of dollars over the next decade on data centers and other AI infrastructure.
Research firm Gartner Inc. forecast worldwide spending on AI to climb to $2.5 trillion in 2026, an increase of 44% over last year, in a note earlier this month.
TD’s Mikkelsen forecasts there could be $500 billion of AI-related issuance this year alone, and that may push US investment-grade debt offerings to $2.1 trillion or higher. Weaker demand for US corporate debt from foreign buyers as dedollarization pushes ahead will likely hurt spreads, he added.
Lower spreads isn’t a phenomenon limited to the US. Yield premiums on global corporate debt across currencies and ratings fell below one percentage point for the first time since 2007 on Thursday, according to a Bloomberg gauge, while spreads on Asian investment-grade dollar notes touched a record low.
Issuance in the US high-grade market is already off to a hot start, with companies selling about $170 billion of notes so far this month, up 13% from a year ago, according to data compiled by Bloomberg.
“There’s going be more issuance coming through the investment-grade market, which probably also means that you have some room for spreads to move wider,” Edwin Wilches, co-head of securitized products at PGIM, said in an interview this week. There is “a bit of a January effect in spreads,” he said, a term often used in the stock market to refer to higher prices at start of year.
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