Credit spreads haven’t looked this good since the 2000s. Can they get better?

Underpinning the surge in debt issuance: credit spreads, a metric that finance chiefs watch when deciding when to pull the trigger on a bond sale. That metric—the additional amount that companies pay above a Treasury of a similar maturity—tightened throughout 2024, ending the year at levels not seen since at least the mid-2000s.

Whether debt issuance remains as strong in 2025 will depend in part on whether spreads remain attractive, advisers said. If companies issue more debt to fund acquisitions or capital investments, that could bolster issuance, as well.

As the Federal Reserve trims interest rates, total borrowing costs in the corporate bond market are expected to decline, though that could change if the central bank moves slower or faster than investors expect, causing spreads to widen. Borrowing costs in the bond market don’t always move in sync with the Fed. The central bank said this month that it will be cautious about further rate cuts.

The improvement in spreads in 2024, alongside strong debt issuance throughout the year, surprised some bankers, advisers and analysts, given earlier uncertainty about the potential for a U.S. recession, as well as a contentious presidential election. But the year also featured strong economic data, solid corporate earnings and a surge in demand from investors.

Spreads on 10-year, investment-grade corporate bonds, which make up the core of the market, stood at 86 basis points as of Thursday, down from 116 basis points a year earlier, according to S&P Global. Before this year, investment-grade spreads hadn’t been that low since 2005.

Spreads on five-year bonds issued by speculative-grade companies fell to 234 basis points from 296 basis points over the same period, according to S&P. Spreads on speculative-grade bonds have hovered over the past two months around their lowest point on record, going back to at least 2003, S&P said.

Companies have taken advantage. Investment-grade companies, in particular, have issued debt to address both near-term and future refinancing, as well as strategic projects, analysts said. Companies have been able to earn high yields on the cash they put on their balance sheet, providing an additional incentive.

The professional-services company Accenture, for example, sold an inaugural $5 billion bond issuance in October, while Meta’s $10.5 billion offering in August was the company’s largest bond sale on record.

Investment-grade companies issued $1.662 trillion in debt this year through Dec. 10, up 27% from the same period a year earlier and the most since 2020, according to financial data provider Dealogic. Excluding financial institutions, companies issued $917.7 billion in debt, up 27% from a year earlier.

“We consider this an opportunistic type of new-issue year, where it’s management teams and companies saying: ‘We’ll figure out what to do with the cash later, but we’re going be able to get really strong execution, and that’s good enough for us,’" said Winnie Cisar, global head of strategy at the credit research firm CreditSights.

“The market kind of defied gravity this year," even before rate cuts began, said Dylan Walsh, global head of corporate and institutional banking at the advisory firm Oliver Wyman, referring to corporate bond issuance.

Among the other notable corporate bond sales: biopharmaceutical company AbbVie had the year’s biggest deal with a $15 billion bond issuance in February, according to Dealogic. AbbVie used the proceeds in part to fund its acquisitions of drugmakers Cerevel Therapeutics and ImmunoGen.

Bankers and advisers expected 2024 to at least be a big year for refinancing. Investment-grade companies had $1.26 trillion in bonds maturing within the next five years as of August 2023, a 12% increase from the prior year, according to Moody’s, the credit ratings firm.

Companies throughout the year felt a sense of urgency to issue when they had the right conditions to do so, expecting volatility in the second half of the year, bankers said. But such volatility never materialized. “The good windows never really stopped," said Stephen Philipson, head of wealth, corporate, commercial and institutional banking at U.S. Bank.

As of September 2024, investment-grade companies had $1.303 trillion in bonds maturing within the next five years, a 4% increase from the prior year, Moody’s said.

Financing for acquisitions and capital investments could play a bigger role in corporate issuance next year, particularly if regulators present fewer challenges to mergers under President-elect Donald Trump and the Federal Reserve continues to cut rates, advisers said. The total value of mergers and acquisitions globally is expected to end 2024 at about $3.5 trillion, up 15% compared with last year when M&A was at its lowest level in a decade, according to Bain, the corporate advisory firm.

“That will be something that we’ll be looking at closely next year," said Matt Toole, director of deals intelligence at the London Stock Exchange Group, referring to event-driven bond issuance, such as for M&A and capital spending.

One wrinkle in an otherwise strong year for corporate issuance: Treasury yields have marched higher since September, making some companies hesitant to issue, bankers said.

Overall, though, finance chiefs in 2024 grew more comfortable with the idea that borrowing costs are likely going to remain higher than they were in recent years, said U.S. Bank’s Philipson. “I think one of the key elements of 2024 is it feels like we psychologically transitioned out of that period," he said.

Whether spreads tighten further in 2025 remains to be seen. JPMorgan Chase projects that a JPMorgan index of investment-grade corporate-bond spreads will end 2025 at 80 basis points, down from 90 basis points as of mid-December.

But macroeconomic risks, such the potential for inflation to reaccelerate, concerns about tariffs or the increasing U.S. deficit, could also cause spreads to widen. CreditSights forecasts investment-grade credit spreads will widen to 110 basis points by the end of 2025 and experience more volatility compared with this year. It bases its forecast on an ICE BofA index of corporate bond spreads.

“It feels like a lot of good news is being priced into credit spreads, and perhaps some of the less constructive things are not being as factored in," CreditSights’s Cisar said.