Risky bonds are now joining the rally of everything, as the premium that investors are demanding so they could hold debt from sub-investment-grade companies instead of the much-safer Treasurys has dropped to near pandemic-era lows, writes Vicky Ge Huang for The Wall Street Journal.

The rally shows that worries about an economic slowdown that would trigger a significant jump in defaults and bankruptcies are dwindling.

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Low-rated debt has surged in a broad market rally, driven by signs of cooling inflation and hopes for interest-rate cuts. According to Refinitiv Lipper, so far this year, investors who were attracted by yields of around eight percent have added a net $3.7 billion into junk-bond funds — which are the first inflows in that period since 2020.

This demand has powered bond sales from a number of companies in recent weeks, such as Jack Dorsey’s Block and Carl Icahn’s Icahn Enterprises. According to PitchBook LCD, low-rated businesses collectively issued $131 billion of speculative-grade debt from January through mid-May, which is an increase of around $71 billion from the same period last year.

Junk bonds are closely monitored by investors and analysts because companies that have weaker credit ratings are often the ones that get hit the most by any economic problems first. But strong demand among these companies, combined with the recent surge in profits for S&P 500 companies, is bringing hope that the economy will cool just enough to help bring rates down but without going into a recession.

“Markets continue to buy in that there will be a soft landing,” said Matt Brill, head of North America investment-grade credit at Invesco. “The all-in yields are enticing buyers to invest, and there are few concerns about a declining economy.”

Fred Hubler, the CEO and Chief Wealth Strategist at Creative Capital Wealth Management Group in Chester Springs, said that the rate on bonds has some competition.

“With cash paying almost five percent most places, the return on a bond needs to be significantly more to justify the risk to the borrower,” he said. “There is more debt globally now than in the history of man, and I’m always the most concerned when the market seems happy. The bond market seems to have priced in a soft landing, which is not guaranteed.”

Read more about risky bonds in The Wall Street Journal.

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