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Analysis-US credit markets defy war risks as cash drives rally
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Analysis-US credit markets defy war risks as cash drives rally
May 12, 2026 9:39 AM

NEW YORK, May 12 (Reuters) - U.S. corporate bond markets are on a roll, with investment-grade credit spreads tightening, issuance rising and solid-looking economic fundamentals encouraging investors to put their cash to work.

Even as the war in Iran has pushed oil prices above $100 a barrel, the risk-taking that has pushed U.S. stock indexes to records and credit spreads within range of historic lows appears to be gaining momentum.

"The market very quickly gets over the bad news," said Johnathan Owen, portfolio manager at TwentyFour Asset Management in New York. The bottom line, he said, is that "people have cash." 

"We're not seeing earnings deteriorate and we're not seeing downgrades tick up. And when fundamentals are strong, people are going to own risk assets," Owen said.

Investment-grade spreads are near historic lows, at 78 basis points over Treasuries, not far from January when spreads hit 73 bps, ICE BofA U.S. Corporate Index data showed. That is tighter than 2007, analysts said, just before the global financial crisis. U.S. high-yield credit spreads tightened to 275 bps last week, the lowest since September.

Investors cited improving credit quality across both investment grade and high yield bonds. U.S. corporate bond issuance for the first four months of the year topped $1 trillion, up 28.2% from the same period a year earlier, SIFMA data showed.

Higher Treasury yields have also been a net positive so far, market participants said.

"While spreads are tight, the higher yield is still attractive for fixed-rate bonds," said Ken Shinoda, portfolio manager at DoubleLine Capital in Los Angeles.

CASH ON THE SIDELINES

Demand for corporate bonds has been underpinned by liquidity, investors said, citing strong money supply growth and expansionary fiscal policy.

Broad U.S. money supply, known as M2, was last up 6% from April 2025 to April this year, according to the latest St. Louis Federal Reserve data.

Contributing to that liquidity is a shift at the Fed, which is buying Treasury bills under a program that has helped anchor bank reserves at the central bank at the $3 trillion level.

M2 contracted during parts of 2023 and 2024 after the pandemic-era surge, in part because the Fed was reducing the size of its balance sheet in a policy known as quantitative tightening.

The recent rebound suggests liquidity conditions have loosened again somewhat, even though the central bank has maintained relatively restrictive policy rates.

"We have the big, beautiful bill from the Trump administration, which is fiscally expansive. That means there's plenty of cash on the sidelines and it's self-fulfilling," said TwentyFour's Owen. "You've got a government that's spending money and that feeds into risk assets."

The presence of large cash balances has also created a strong technical backdrop, where investors expect modest spread widening-estimated at 15 to 30 basis points in investment grade-to be quickly absorbed by inflows.

What's more, investors entered the recent bout of volatility defensively positioned and are now gradually returning to neutral, helping fuel rallies in primary and secondary markets.

Insurance companies, in particular, have become a major driver in U.S. credit markets, DoubleLine's Shinoda said, due to strong demand for fixed-rate annuities. A fixed annuity issuer earns money from the spread between what it earns on invested assets and what it credits to policyholders.

Treasuries alone often do not provide enough yield to make annuities economically attractive, especially after accounting for distribution costs, reserves, hedging expenses and regulatory capital charges. So insurers tend to reach for incremental yield in corporate credit.

Shinoda estimated that insurers now account for close to half of demand in some segments of the corporate bond market, up from roughly 20% a decade ago.

On the supply side, primary issuance remains robust, led by AI hyperscalers. New deals are clearing with minimal or no concessions, and books are multiple times oversubscribed, analysts said, reflecting strong investor demand.

BNP Paribas said it expects a record of roughly $2 trillion in investment grade bond supply for 2026.

HEALTHY BALANCE SHEETS; VULNERABILITIES

Vulnerabilities persist beneath the surface, however. Investors flagged lower-quality segments of high yield and private credit as areas of concern, particularly if economic growth slows. Rising defaults in those segments could act as a transmission channel for broader credit stress, analysts said.

For now, however, the combination of strong fundamentals, ample liquidity and steady inflows continues to anchor credit markets.

Corporate balance sheets remain stable, with no meaningful pickup in downgrades or earnings deterioration, reinforcing investor confidence even as macro uncertainties linger.

"Tight spreads limit the excess return potential of the sector, but the risk of significant spread widening is lessened by the excellent health of corporate balance sheets," said Ryan Swift, chief U.S. bond strategist at BCA Research. 

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