The benchmark Treasury yield's rapid climb higher these last few months has sent shivers up the spines of those who might need to borrow money soon. But something unusual is happening in the corporate bond market — borrowing costs haven't really gone up.
Why it matters: It's another sign that investors aren't that concerned about an upcoming recession.
How it works: The cost of debt like mortgages and corporate bonds is benchmarked to the 10-year Treasury.
- Investors expect to get paid more for taking on the higher risk of lending to, say, a homeowner, rather than chilling in the so-called risk-free trade of lending to the U.S. government.
- That gap, or risk premium, is expressed as a spread over Treasuries. If the perception of risk in the market is going up, the spread gets bigger — if risk is going down, the spread gets smaller.
- For example: Spreads blew out in the immediate aftermath of Silicon Valley Bank's failure.
- Meanwhile, if the 10-year yield increases, the total cost of borrowing that's pegged to it would go up by a similar amount, if spreads remain around the same level.
What's happening: These last few months, the 10-year yield shot up by over a point. Likewise, the average cost of a 30-year mortgage is also up by about a point — to an eye-popping 7.23%.
- But in the corporate bond market, where large companies borrow trillions of dollars, the risk premium has actually shrunk, as the chart above shows.
- For high-yield (HY) bonds, the average all-in yield — think of that as the 10-year Treasury rate plus the spread — is about the same as it was 4 months ago, per the BofA ICE index.
- And for investment-grade bonds, the cost to borrow is higher, but only by a tad — spreads have gotten smaller there, too, offsetting the impact of the rising benchmark.
What they're saying: "The market definitely came into the year broadly with some expectation of a recession ... But the consumer, and the economy globally, has held up much better than people expected. So that is certainly playing an overarching role," Christopher Miller, senior multi-sector credit portfolio manager at Neuberger Berman, tells Axios.
- The recent movement in spreads reflects expectations for "a relatively benign credit cycle," says Bill Zox, high-yield portfolio manager at Brandywine Global.
The bottom line: There are a myriad of technical factors behind spreads and yields, of course — and things could change on a dime. But if credit investors were prepping for a damaging recession, spreads wouldn't be shrinking so forcefully.