Credit investors are increasingly turning to corporate bonds despite ongoing Middle East tensions, driven by attractive yields and strong corporate fundamentals. According to Bloomberg reports, risk premiums on US investment-grade bonds fell to their lowest level since early February, while high-grade bond funds saw the most inflows since September 2020 in late April and early May. The shift is particularly evident as Gilead Sciences Inc. sold longer-dated debt at a yield below that of its existing debt, signaling unusually high demand levels.
The corporate bond market is demonstrating strong performance relative to government securities. As reported by Bloomberg, investors poured another $4 billion into short- and intermediate-term investment-grade bond funds in the week ended May 13, following roughly $6.9 billion the previous week - the largest weekly inflow since September 2020. Each offering of new investment-grade corporate bonds in the US attracted orders of about four times the amount eventually sold on Thursday, matching demand levels recorded earlier in the year and in 2025.
Government securities are facing headwinds from inflation concerns and monetary policy expectations. According to Bloomberg reports, the 10-year Treasury yield reached its highest level in about a year on Friday, as traders price in rate hikes by major central banks. The Federal Reserve is expected to boost its policy rate by March 2027, while both the European Central Bank and the Bank of England are forecast to raise rates three times by then to combat inflationary pressures from rising oil prices.
Strong corporate earnings are supporting the bullish sentiment in credit markets. As reported by Bloomberg, among US companies, earnings beat estimates by more than 13% in the first quarter, while European earnings surprised by 5%. According to Societe Generale credit strategist Juan Valencia, one of the main pillars of resilient credit market performance has been solid fundamentals, with leverage remaining healthy for now. However, Mirabaud Asset Management's Al Cattermole notes that spreads may be pricing in no negative growth impact from the Iran war, which could be an oversight.
The corporate bond rally extends beyond US markets, with significant activity across European and leveraged loan segments. According to Bloomberg data, European junk bond markets have raised €42.6 billion year-to-date, the most since 2021, while the US leveraged loans market had its busiest week since January with $35 billion of deals pricing. A key gauge of European credit risk has dropped to pre-Iran war levels, indicating improved market confidence despite geopolitical uncertainties.
