A new AI borrowing frenzy and lingering fears about potential defaults haven’t deterred investors hungry for bonds from U.S. companies, states and cities.
The extra yield—or spread—that investors demand to hold highly rated corporate bonds instead of ultrasafe U.S. Treasurys hit a 27-year low in late January. Spreads on speculative-grade corporate bonds dropped to an 18-year low. In the $4 trillion municipal bond market, the spread between interest rates on triple-A and triple-B bonds is at one of its lowest points in two years.
Those tight spreads are the latest sign of how bonds remain stubbornly resistant to concerns rattling other markets.
Yes, the dollar has been falling, gold and silver have swung wildly, and the stock market is jittery with fears of inflated valuations and runaway artificial-intelligence spending. But debt investors are shrugging off policy uncertainty and geopolitical strains, happily gobbling up the bonds of such companies as Oracle and Alphabet, which issued a combined $45 billion of dollar-denominated bonds this month to help fund significant investments in AI infrastructure.
Investors are buying in part because “yields in the U.S. are still really high relative to most of the world’s developed bond markets,” said Michael Collins, executive portfolio adviser at PGIM Fixed Income.
Investors, he added, sense that short-term interest rates set by the Federal Reserve might have more room to fall in the U.S., possibly leading to further price gains by making the coupons offered by existing bonds look more attractive.
Some on Wall Street fear the tighter spreads are insufficiently compensating investors for risk and encouraging speculative borrowing. They see investors’ apparent confidence in the long-term health of the U.S. economy as misplaced when the Trump administration’s immigration raids and stepped up hostility toward Greenland and Iran are fueling political uncertainty at home and abroad.
Bond spreads briefly spiked last year after the sudden collapses of the auto lender Tricolor Holdings and the auto-parts supplier First Brands, both of which now face allegations of fraud. Investors were worried about what JPMorgan Chase Chief Executive Jamie Dimon called “cockroaches” in the market. Further pressure came from a flood of new bonds issued by so-called AI hyperscalers, which some worried could overwhelm investor demand.
Since then, nerves have calmed and spreads have continued to grind ever tighter, apart from recent turbulence in the speculative-grade loan market, which has been hit by concerns about the threat posed by AI to software companies.
“This is about investor complacency,” said Joseph Brusuelas, chief economist at RSM.
In the municipal market, where state and local governments sell debt to build bridges and high schools, investors readily absorbed a surge in new bond issuance over the past few years. Fifteen years of anemic supply following the 2008-09 financial crisis had left bondholders starved for new muni debt, a favorite of wealthy American households because it pays out interest exempt from federal income taxes.
“For all the news about state budgets and immigration enforcement, people are just hoovering up” all the municipal bonds they can find, said Matt Fabian, president of Municipal Market Analytics.
Corporate bonds, meanwhile, have been in high demand around the world—particularly harder to find, longer-dated debt. In such places as Taiwan and Japan, with less-developed domestic credit markets, life insurers and other institutional investors turn to the U.S. corporate bond market to buy debt maturing in 25 years or more, said Daniel Sorid, head of U.S. investment-grade credit strategy at Citi.
But after interest rates began increasing four years ago, companies became reluctant to lock in those higher borrowing costs for longer periods. Corporate borrowers with rate-sensitive borrowing patterns cut the share of debt they issued with maturity dates in 20 years or longer to 13% in 2025 from around 30% in 2021, according to a Citi analysis. The gap between supply and demand for those long-dated bonds is helping drive the corporate bond market’s historically tight spreads, Sorid said.
Issuance of long-dated bonds will likely increase this year, Sorid said, as companies sell debt to finance AI investments and an expected uptick in mergers and acquisitions. Of the $45 billion of dollar-denominated bonds sold by Oracle and Alphabet this month, $17 billion will mature in 20 years or more.
Alphabet also issued $11.5 billion of bonds denominated in British pounds and Swiss francs. In a sign of strong demand, that offering included a rare £1 billion “century bond” that won’t mature until the year 2126.
Oracle said just before its bond sale that it would raise $45 billion to $50 billion this year, half of it from issuing new equity—an encouraging development for bond investors who worried that the company might lean even more on debt financing.
Still, analysts warn that bond spreads could generally widen if investors, faced with more ample supply, begin to weigh concerns such as policy uncertainty and geopolitical strain more heavily.
“The outlook for conditions in credit markets has gotten a lot hazier,” Sorid said.
Write to Heather Gillers at heather.gillers@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com