What’s Driving Tight Credit Spreads in Today’s Bond Market?

Credit spreads, the yield premium investors demand for corporate bonds over risk-free Treasuries, are hovering near multi-decade lows in 2025. Investment-grade spreads recently touched 0.83%, levels not seen since 1998, while high-yield spreads compressed to 2.83 percent, the tightest since 2007. Historically, razor-thin credit spreads have been a vote of confidence from investors, but they can also be a warning light, signaling complacency in risk pricing and the potential for sudden volatility.

Corporate bond issuance has slowed, particularly in the high-yield segment. Geopolitical uncertainty and refinancing-driven activity have reduced new supply. At the same time, demand for yield remains strong. With policy rates elevated and inflation moderating, fixed income continues to attract investors seeking relative safety and income. This supply-demand imbalance is a key driver of spread compression.

The rise of private credit and leveraged loans has diverted capital away from public bond markets. As institutional investors increasingly favor private deals for their tailored risk-return profiles, public bond supply has tightened, reinforcing the trend toward

narrower spreads.

Many corporate issuers, especially in the investment-grade space, are benefiting from resilient earnings, conservative balance sheets, and ample liquidity. These fundamentals support tighter spreads by reducing perceived default risk. Even in high yield, default rates remain below historical averages, bolstering investor confidence.

Despite volatility in equities and global geopolitics, bond markets have remained relatively stable. Even as the Federal Reserve resumes rate cuts, investor sentiment has held firm, supported by strong corporate fundamentals and resilient demand for income. As a result, credit spreads have not yet widened materially.

“Historically, razor-thin credit spreads have been a vote of confidence from investors, but they can also be a warning light, signaling complacency in risk pricing and the potential for sudden volatility.”

This relative stability presents both opportunity and risk, prompting a closer look at portfolio positioning. We have reassessed credit exposure across portfolios, trimmed overweight positions in sectors with limited spread cushion, increased allocation to instruments offering stronger downside protection, stress-tested portfolios for spread normalization scenarios, and adjusted duration to reflect asymmetric risk. Where appropriate, we have also added municipal bond exposure to take advantage of attractive after-tax yields and strong credit fundamentals. These measures aim to maintain flexibility and resilience in a potentially shifting macro landscape.

While tight spreads reflect optimism, they also demand vigilance. History reminds us that spread cycles can reverse quickly, especially when macro conditions shift. Strategic positioning and disciplined risk management remain essential as we navigate this compressed credit environment.

At Altman Advisors, we help clients navigate fixed-income dynamics within the context of their total portfolio, balancing income potential with prudent risk management. If you’d like to review how bonds fit into your overall strategy, we are here to help.