The risk premium investors demand when purchasing corporate bonds has tumbled to its lowest level in nearly two decades, as sophisticated fixed-income buyers show no fear despite an incredibly uncertain world.
Unlike stocks, where investor appetite can be measured with metrics such as the price-to-earnings ratio, debt investors show their willingness to buy corporate bonds through the interest rate, or yield, premium they demand over and above government bonds. Fixed-income markets are “remarkably sanguine given the geopolitical risks,” wrote Nicole Serino and Christian Esters, credit analysts at debt rating agency S&P Global Ratings, in a research note to clients this month. Examples of these risks include chaos in the Middle East, a weak Chinese economy, the potential for global trade tariffs and uncertainty over the Russia-Ukraine war.
The historically-low premiums prove recent investor euphoria isn’t isolated to markets that attract retail buyers.