Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Bull Markets Are Reshaping Corporate Bond Markets in 2026
Transcript
- Lucas: Luna, you know what I've been watching closely this week? Corporate bond yields. Specifically, the fact that investment-grade bonds are now yielding below 4.5 percent for the first time since early 2021. That's a big deal in a bull market where everyone's fixated on equities. Luna: It's funny — I almost never hear people talk about bonds when stocks are ripping. But you're right, that's a major signal. What's driving it? Lucas: Two things. First, the Fed held rates at 3.63 percent and the market believes they're done hiking. That's anchoring the front end. Second, the bull market itself is compressing credit spreads — investors are hungry for yield and willing to take on more risk. So companies that were paying 5 or 6 percent a year ago are now issuing debt at 4 percent or less. Luna: Right, so it's a refinancing wave. I saw that a major telecom company — I won't name it because it's not public yet — just priced $2 billion in ten-year notes at 4.2 percent. That's a record low coupon for that issuer. Lucas: Exactly the example I was going to cite. And it's not just one company. According to data from the Securities Industry and Financial Markets Association, investment-grade issuance in May hit $150 billion — that's the highest monthly total since April 2020, the peak of the pandemic refinancing boom. Companies are locking in low rates while they can. Luna: But here's the thing — if the bull market falters, or if inflation reaccelerates and the Fed pivots back, those low-coupon bonds become less attractive. And the companies that issued them might have trouble refinancing when they mature. Lucas: That's the classic risk. And it's actually showing up in the shape of the yield curve. The two-year Treasury yield is at 3.9 percent, the ten-year is at 4.3 percent — that's a very flat curve. Historically, a flat curve after a Fed tightening cycle has preceded recessions about half the time. Luna: So the bond market is telling a slightly different story than the stock market. Stocks are at all-time highs — the S&P 500 closed above 7,500 this week. But the bond market is pricing in slower growth ahead. Lucas: That divergence is exactly what makes this interesting. On one hand, the bull market is self-reinforcing: rising equity prices boost confidence, which compresses credit spreads, which lowers borrowing costs, which supports corporate profits. But on the other hand, the bond market is saying 'not so fast' — the real economy may not grow as fast as the stock market suggests. Luna: Which brings us to the high-yield market. Spreads on junk bonds have compressed to around 320 basis points over Treasuries — that's the tightest since 2018. Companies with below investment grade ratings are borrowing at close to investment-grade rates. Lucas: Right, and that's a double-edged sword. It's great for companies that need capital — they can refinance at lower costs. But it also means investors are not being adequately compensated for the risk of default. If the economy slows, those tight spreads could widen very quickly. Luna: So what's your take? Are companies being smart by locking in low rates now, or are they taking on too much debt in a late-cycle bull market? Lucas: I think it depends on the company. For a firm with strong cash flows and a manageable debt load, refinancing at 4 percent instead of 6 percent is smart capital management — it frees up cash for investment or dividends. But for a company that's already highly leveraged, adding more debt at low rates just kicks the can down the road. If growth slows, they'll be stuck with payments they can't cover. Luna: And that's where credit rating agencies come in. Moody's and S&P have been upgrading more companies than they've been downgrading in the past six months, which is typical in a bull market. But they're also warning that the quality of credit is deteriorating — more bbb rated bonds, which are one notch above junk. Lucas: The 'fallen angel' risk is real. If the economy turns, a wave of bbb rated companies could be downgraded to junk, forcing institutional investors to sell. That could create a liquidity crunch in the bond market. Luna: So the bull market in stocks is partly being fueled by cheap debt, but that debt comes with a future cost. It's like the market is borrowing from tomorrow to pay for today's rally. Lucas: That's a great way to put it. And it's not just corporations — the federal government is also benefiting from lower yields. The Treasury issued $20 billion in twenty-year bonds this week at 4.5 percent, down from 4.8 percent in March. That reduces the cost of servicing the national debt. Luna: But that also means the government is locking in higher rates than it paid a decade ago. The ten-year yield averaged around 2 percent from 2010 to 2020. So even 4.3 percent is historically high. Lucas: Exactly. Context matters. We're comparing today's yields to the post covid spike, not to the pre covid era. The real question is: where do yields go from here? If the bull market continues and growth picks up, yields could rise, making today's bonds less valuable. If growth slows, yields could fall, and today's bonds would look attractive. Luna: So it's a bet on the trajectory of the economy. And right now, the bond market is betting on slower growth, while the stock market is betting on continued expansion. Something's got to give. Lucas: That's the tension at the heart of this bull market. And it's why I think credit markets deserve more attention than they're getting. They're often the canary in the coal mine. Luna: Speaking of which, I want to circle back to something you said earlier about the refinancing wave. I've been thinking about how this affects the average investor. If you own bond ETFs, you're indirectly exposed to all these corporate decisions. Lucas: Absolutely. The iShares iBoxx Investment Grade Corporate Bond ETF, ticker l q d, has seen inflows of $8 billion this quarter as investors chase yield. But if rates rise, the NAV of that ETF will fall. Investors need to understand that bond funds are not like individual bonds — they don't have a fixed maturity. Luna: Right, you can't just hold to par. And with spreads so tight, the income advantage over Treasuries is minimal. You're taking on credit risk for maybe 100 basis points of extra yield. Lucas: That's a thin margin of safety. Historically, the average spread for investment-grade bonds is about 150 basis points. Below 100, you're in territory that's only been seen a few times in the past two decades — and each time, it preceded a widening cycle. Luna: So maybe the smart play is to take some profits in high-grade bond funds and rotate into shorter-duration bonds or cash equivalents, at least until the economic picture becomes clearer. Lucas: That's a conservative approach, and it makes sense. Money market funds are yielding around 3.5 percent right now, which is competitive with short-term bonds. And you have no duration risk. Luna: But for the long-term investor, bonds still have a place in a diversified portfolio. The key is understanding what you own and why. Lucas: And that's really the theme of this entire bull market — understanding what's driving the moves, and not just assuming that because stocks are up, all is well. The bond market is sending a more cautious signal. Luna: You know, conversations like this are why I love doing this show. We get to dig into the mechanics of markets and help people make sense of what's happening. Lucas: And if these conversations have helped you think about your own investments differently, we'd love to have your support. This show is ad-free, and listener contributions keep it that way. If you're inclined, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just an option. Luna: Yeah, it's a small way to say thanks if you've gotten value from the episodes. And we appreciate every single listener, regardless. Lucas: Absolutely. Now, back to the bond market — I want to leave you with one data point. In the past five bull markets, corporate bond spreads have typically bottomed out about six months before the market peak. If that pattern holds, the current tightness might be a warning sign. Luna: So watch the bond market, not just the stock market. That's the takeaway. Lucas: Exactly. Until next time, keep your eyes on the full picture.