What Are Credit Spreads and Why Do They Matter?
Credit spreads are the difference in interest rates between corporate bonds and government bonds, like U.S. Treasury bonds. Companies pay more interest on their bonds to attract investors since they are riskier than government bonds. If the spread is small, it shows that investors trust the company. If it’s big, they see more risk.
In 2024, credit spreads became much smaller, reaching levels not seen since the mid-2000s. This made it cheaper for companies to borrow money by issuing bonds.
What Happened in 2024?
Credit Spreads Shrunk
For high-quality (investment-grade) companies, the extra interest they paid on 10-year bonds was just 0.86%, down from 1.16% a year earlier. For riskier (speculative-grade) companies, spreads on 5-year bonds dropped from 2.96% to 2.34%. These are some of the lowest spreads seen in decades.
A Strong Economy Helped
Even though some people worried about a U.S. recession or the presidential election, the economy in 2024 performed well. This led to:
- Big profits for companies.
- Strong demand from investors to buy bonds.
- Positive economic news that calmed fears about market problems.
Record Bond Issuance
Companies used these good conditions to issue lots of bonds:
- High-quality companies issued $1.662 trillion in bonds by December 2024, 27% more than in 2023.
- Non-financial companies issued $917.7 billion, also up 27%.
These bonds were used to refinance old debt, fund projects, and save money for future needs.
Examples of Bonds Issued in 2024
Accenture
The consulting company issued $5 billion in bonds in October, showing how companies used smaller credit spreads to borrow money at low costs.
Meta
Meta Platforms issued $10.5 billion in bonds in August, the largest in its history. The money supported the company’s growth plans.
AbbVie
AbbVie, a pharmaceutical company, issued $15 billion in February. It used the money to buy other companies, including Cerevel Therapeutics and ImmunoGen.
Why Were Credit Spreads So Tight?
Lower Interest Rates
Investors expected the Federal Reserve to lower interest rates, which made borrowing cheaper. Even though Treasury bond yields increased late in the year, corporate bonds still looked attractive.
Investor Confidence
Both high-quality and riskier corporate bonds had strong demand. Investors liked the high returns and trusted companies to pay them back.
Proactive Borrowing
Some companies borrowed money even if they didn’t need it right away. They took advantage of good borrowing conditions to build up cash reserves.
What Could Happen in 2025?
Whether credit spreads stay small in 2025 will depend on things like:
- Federal Reserve Actions: If the Fed changes rates faster or slower than expected, spreads could shift.
- Economic Risks: Inflation or government debt problems could make spreads bigger.
- Mergers and Acquisitions: Companies might issue bonds to buy other businesses or invest in growth.
Predictions for 2025 vary:
- JPMorgan Chase thinks high-quality bond spreads will shrink to 0.80%.
- CreditSights expects spreads to grow to 1.10% because of potential risks.
Conclusion
In 2024, small credit spreads and strong economic conditions made it a great year for companies to issue bonds. As we move into 2025, investors and companies will watch closely to see how the economy and Federal Reserve policies impact the bond market.
