Global credit markets reach two-decade high amid rising risk complacency

Global credit markets are running at their hottest in two decades, with yield premiums on corporate debt compressing to levels not seen since 2007, prompting some of the world’s largest asset managers to warn that investors may be growing dangerously complacent.

According to a Bloomberg index of bonds across currencies and ratings, yield spreads have tightened to roughly 103 basis points, the narrowest since June 2007, while Barclays Plc’s measure of risk complacency in the US debt market recently hit 93%, its highest since December 2024. New-issue dynamics underscore the fervour: the new-issue concession on US corporate bonds has fallen to about 0.013 percentage point (1.3 basis point), far below last year’s average, and order books this year have been more than four times oversubscribed on average. Companies issued roughly $435 billion of bonds in the first half of January, a record for the period, and Goldman Sachs on Thursday executed a $16 billion investment-grade sale, the largest ever by a Wall Street bank, Bloomberg data shows.

“Complacency should be the scariest word in risk markets right now,” said Luke Hickmore, an investment director for fixed income at Aberdeen Investments, urging caution: “All you can do is not lean too hard into high-risk areas.” Pimco strategists Tiffany Wilding and Andrew Balls have similarly warned that strong recent returns are feeding complacency and that the firm is becoming more selective across credit as it expects fundamentals to deteriorate.

Money managers face a paradox: robust corporate fundamentals and the prospect of central-bank rate cuts are supporting tight spreads, yet those narrow margins leave little cushion for error. “The US economic outlook is priced to perfection in credit markets,” Scott Kimball, chief investment officer at Loop Capital Asset Management, said, adding that the market is “very susceptible to geopolitical shocks externally, but internally as well.”

Concerns extend beyond geopolitics. Charles Schwab’s fixed income strategist Collin Martin told a Bloomberg podcast that defaults are likely to remain elevated because the weakest borrowers have low interest coverage ratios, increasing the risk that companies may fail to meet obligations even amid the rally. Alexandra Ralph, senior fund manager at Nedgroup Investments in London, warned that markets are not adequately pricing geopolitical risk: “While historically strong corporate fundamentals build a case for historically tight spreads, there is not much margin for error, making the US debt market very susceptible to geopolitical shocks externally, but internally as well.”

Investors’ appetite for carry is nevertheless keeping demand high. BlackRock’s Max Huefner described a cautious but engaged stance: “We are positioned to buy new deals. We are cautious. But in the end we need to make returns and we like carry.” That demand has helped push junk spreads down to their lowest in nearly two decades as well.

Policy uncertainty complicates the picture. The Fed’s path , and market expectations of eventual rate cuts , is a major underpinning of the rally, yet political and legal developments have intruded. The US Department of Justice’s probe involving Federal Reserve Chair Jerome Powell has drawn attention to the fraught interaction between policy independence and political pressure, a context that managers say could amplify volatility if markets reassess forward guidance.

The World Bank’s recent upward revision to its global growth forecast, to 2.6% from 2.4%, offers some support for the upbeat narrative, but managers caution that sustaining growth without rekindling inflation will be a delicate balancing act for policymakers.

Given the compressed spreads and record issuance, several large managers stress the need for selectivity and risk controls. “Most of the outlooks and news coverage featured the expectation of record supply and I think people read that and were positioned for that,” Max Huefner said, noting why portfolios still hunt yield despite caution. Aberdeen’s Hickmore and Pimco’s analysts advocate avoiding overexposure to higher-risk slices of the market and focusing on credit selection.

The current rally leaves little margin for surprise, from geopolitical events, unexpected economic weakness, or undisclosed corporate liabilities akin to those that precipitated sudden collapses in the past. Industry data and the comments from major managers converge on one conclusion: returns so far have been strong, but the market’s appetite for risk may be outpacing its appetite for protection.