Corporate spreads over similar-maturity treasuries are near their lowest level of the year at just 73 basis points, but we think spreads could grind even tighter, which would help boost their total return profile.  

We believe spreads could fall into the 60s, where they haven’t been since 1997! Back then, underlying Treasury yields were quite elevated, with the 10-year at 6.9%, but even then, investors still wanted the incremental yield from buying high-quality corporates yielding 7.5%. And, corporate bonds delivered 10% in total returns that same year!

We are now approaching $1 trillion in new issue corporate supply so far this year, which is up over 20% from the same period last year. This includes over $100 billion in supply from hyperscalers alone, such as Amazon, Alphabet, and Meta, and these deals were met with overwhelming demand.

While we may not get any Fed cuts this year to help boost total returns, we think corporates still offer an attractive risk-adjusted return profile and make a lot of sense as part of a well-diversified portfolio allocation.

The starting yield is a good indicator of expected total returns, so we wouldn’t be surprised to see investment-grade corporates deliver returns in the mid-to-upper single digits in the year ahead.