Even though the threats aren't there, fear is retreating from the corporate bond market once more. Earlier this week, US high-grade spreads reached their narrowest levels since October and nearly reached their highest valuation in decades at 0.76 percentage points.
Since late November, they have been getting closer. In recent weeks, the cost of hedging has also decreased in the high-grade credit derivatives market in North America.
However, some strategists and investors predict storm clouds. Next year, a significant amount of bonds will be sold to finance investments in artificial intelligence.
According to Barclays Plc strategists, this could contribute to an increase in US high-grade bond sales to approximately $1.6 trillion in 2026, an increase of approximately 11% from this year.
This week, Oracle Corp. recorded negative free cash flow for its most recent quarter. Additionally, Bloomberg reported that several of the company's data center projects will take longer to finish than anticipated, highlighting the risks that IT giants are currently incurring.
Additionally, a number of significant debt-funded acquisitions in recent weeks, such as Netflix Inc.'s agreement to purchase Warner Bros. Discovery Inc., which may spark a bidding war, might further increase bond sales.
Next year, there may be more large takeovers, partly because businesses believe President Donald Trump's US government is more amenable to such agreements.
In a note this week, strategists at JPMorgan Chase & Co. stated, "We do not believe that the strong spread performance this month is necessarily sustainable into the new year."
Due in part to corporate selling pressure, Barclays strategists predicted that spreads on US high-grade bonds would likely reach between 0.90 and 0.95 percentage points by the end of the next year.
US corporate bonds are currently benefiting from a few variables, including the likelihood of low new sales for the remainder of the year.
As a result, buyers of the securities will need to buy current notes, which may cut risk premiums. In the meantime, the Federal Reserve lowered interest rates on Wednesday, which contributed to a general increase in securities values and financial market liquidity.
Hunter Hayes, chief investment officer at Intrepid Capital Management, who frequently examines high-yield debt, added that businesses throughout the credit spectrum are usually doing well from a profitability standpoint.
Hayes stated, "The fundamental picture for the issuers of these bonds is pretty healthy." However, as is customary at the beginning of the year, substantial debt issuance will likely resume in January.
A few weeks ago, US high-grade spreads were as wide as 0.85 percentage points, or 85 basis points, on average due to concerns about such selling pressure.
Over the next five years, $1.5 trillion in investment-grade bond sales are expected to be driven by significant investments in artificial intelligence from tech companies and others, according to JPMorgan.
Oracle's recent vulnerability highlights how investors can become fearful of certain corporations even when they are generally secure in their ability to repay their obligations.
Now, some of the high-grade notes that Oracle sold in September are trading more like trash bonds. The current paper losses on the $18 billion in bonds are around $1.35 billion.
The company claims to be dedicated to maintaining its investment-grade position, and a representative for its data centers stated that all milestones are still on schedule and that there have been no delays to any sites needed to fulfill contractual obligations.
Barclays strategists stated earlier this month that it's difficult to claim that now is the best time to buy because values are already so high.
