The Federal Reserve's interest rate cut triggers a buying spree, as the spread on U.S. corporate bonds is compressed to a 27-year low
After the Federal Reserve's first interest rate cut since 2024, investors are rushing to lock in high yields, and the risk premium on U.S. corporate bonds has fallen to 72 basis points, a new 27-year low. Despite the rate cut, bond yields remain higher than levels seen over the past 15 years, attracting yield-driven investors such as insurance companies to continue buying. Barclays analysts point out that the current yields are still attractive to income-focused investors and expect that future rate cuts will further lower yields
The Zhitong Finance APP noted that a key valuation metric for U.S. corporate bonds has reached its highest level in nearly thirty years. This follows the Federal Reserve's first interest rate cut since 2024, prompting investors to rush to lock in still high yields.
According to Bloomberg index data, on Thursday, the risk premium for U.S. investment-grade corporate bonds (the additional yield investors demand for holding high-quality corporate bonds over government bonds) narrowed to just 72 basis points. This narrowing of the spread marks a new multi-decade low for this metric—this spread had touched 73 basis points in August this year, the lowest level since 1998.
As the spread narrows, investors are rushing to buy bonds ahead of further interest rate cuts by the Federal Reserve. Although the Fed implemented a rate cut on Wednesday, bond yields remain high relative to levels over the past 15 years, and yield-focused investors, such as insurance companies, still have the motivation to continue buying.
Dominique Dubrun, head of U.S. credit strategy at Barclays, stated: "Historically, when coupon rates are at current levels, they typically limit volatility. Demand remains strong, driven by yield. The current yield levels are still attractive to yield-focused investors."
As of Thursday's close, the average yield on high-grade bonds was 4.76%, compared to an average of about 3.6% since 2010.
For most of the past three years, the average yield has remained above 5% as the Federal Reserve raised interest rates from near-zero levels to curb the post-pandemic inflation surge. Relatively high yields have been a significant driver of demand from investors such as pension plans, which typically need to fund long-term liabilities.
At the September Federal Reserve meeting, policymakers also updated their economic forecasts, now expecting two more 25 basis point rate cuts this year, one more than predicted in June. They also expect one rate cut each in 2026 and 2027. These rate cuts could further depress yields, intensifying the urgency for some investors.
Dubrun pointed out that in the current stable environment, maintaining a tight spread is ideal. "In a sense, it's like having the right timing and conditions: fundamentals are solid, demand is strong, and supply is not under excessive pressure."
