[NEW YORK] The malaise sweeping financial markets globally is creeping into credit markets.
Risk premiums on everything from investment-grade corporates to junk bonds are hovering near their highest levels in weeks. On Monday (Nov 17), investors withdrew about 40 per cent of bond orders on several corporate bond offerings after seeing final pricing, an unusually high level of attrition. A separate investment-grade bond sale was pulled from the market altogether last week, a rarity in that market. In the leveraged loan market, banks have struggled to sell some debt tied to acquisitions.
Credit markets are far from panic, with valuations still close to multi-decade highs, but money managers say more caution is seeping in. The S&P 500 on Tuesday is on track for its fourth straight day of declines, which would be its longest losing streak since August, and is down about 3 per cent from the middle of last week. The tech company shares that have fuelled much of 2025’s gains are dropping as investors fear that artificial intelligence (AI) may not fully live up to its hype.
“There are signals that there may be growth issues, and it’s not being reflected in bond yields,” said Brij Khurana, a portfolio manager at Wellington Management Company.
That may be part of why debt investors are growing more cautious. Money managers have snatched up a large number of tech bonds in recent weeks: the companies known as hyperscalers have sold about US$121 billion of US dollar high-grade notes this year, up from about US$28 billion on average over each of the last five years, Bank of America strategists wrote on Monday. About US$81 billion of that has come since September.
“This wave of supply is an order of magnitude larger than what we’ve seen over the prior years,” said Brian Wong, a portfolio manager at the Capital Group. “The market is starting to question who will be the winners, who will be losers, and what will be the return on that investment.”
Money managers’ growing caution was evident in bond sales on Monday, when Amazon.com sold US$15 billion of notes, garnering about US$80 billion of orders from investors at the peak. Once pricing was revealed, that figure fell to closer to about US$47 billion, a drop of more than 40 per cent. The decline in orders in the end was unusually steep, in a market where attrition is usually more like 20 per cent. Three other offerings saw similar drop-offs in orders on Monday.
A key data point is coming on Wednesday, when Nvidia is due to post quarterly results. The outlook it gives investors could be a bellwether for how AI investment is faring.
“We are about to receive a lot of information that I think is important for justifying valuations,” said Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management. “It’s really important to understand where AI is, and where these companies are still spending less than what they are making or taking in-does that change?”
There are other early signs of fear in credit markets. The lowest-rated bonds that usually trade, those rated in the CCC tier, saw their yields climb to 10.38 per cent on Monday, the highest since late August. Risk premiums for the securities also climbed to their widest in about three months. The Markit CDX North America High Yield Index, which falls as risk increases, declined to about 106.4, its lowest since June.
A bond that Applied Digital sold earlier this month, US$2.35 billion of notes due in five years, traded as low as about 94 cents on the US dollar before retracing closer to 96 cents. The bonds were originally sold at 97 cents.
Even with these signs of weakness, the average spread on a US high-grade corporate bond was about 0.83 percentage point, or 83 basis points, on Monday, according to Bloomberg index data. That’s still relatively low – the average for the last decade is 1.17 percentage points.
To some investors, that’s the problem: bond valuations are still too strong to offer much upside now.
“We are getting paid so little on spread that frankly we are not very interested,” said Michael Kelly, global head of multi-asset at PineBridge Investments, regarding corporate bonds. “We are in a technologically turbulent and rapidly changing world.” BLOOMBERG
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