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There areSPYour browser does not support the element. normally few thrills to be had from investment-grade bonds, which is just the way it should be. After all, this is lending to the very safest companies. Just now, however, bondholders are throwing a veritable rave.To gauge their mood, look at the “credit spread”, or additional interest they charge corporate borrowers over and above the yield on equivalent government bonds. At 0.8 percentage points, the average credit spread on American investment-grade bonds was last this low in 2005, amid a lending surge that helped set the stage for the global financial crisis. Asian spreads are similar, and European ones not much higher. The bankers who help companies issue new bonds have not been so busy since policymakers flooded markets with liquidity during the covid-19 pandemic.Interest rates spent much of the past two decades on the floor. Now they have increased sufficiently that, even when accounting for razor-thin credit spreads, the all-in yields on plenty of high-grade corporate bonds are well above 5%. That looks rather good compared with the 4% earnings yield which is implied by the ratio of American share prices to underlying profits expected in 2025. Small wonder investors are keen on bonds, or that companies are exploiting their enthusiasm to issue more.Yet in another sense, today’s seemingly red-hot market comes as a shock. Racier forms of corporate debt, ranging from risky “junk” bonds to modish private credit, have been booming for decades. In contrast, the stature of the bog-standard corporate bond has trended firmly in one direction—down—for not just decades but centuries.First issued by municipal Venice in the 1100s, bonds once made up the entirety of capital markets. Companies started selling them in the 1600s, around the same time as they began selling shares. Although stocks stayed grubby for aeons, corporate bonds became respectable more quickly. In the 19th century they were the least volatile securities on the Paris bourse; in America they outperformed shares for decades. Long after the Wall Street crash of 1929, investors still spurned stocks. As late as the 1950s they were happy to accept yields of 3% on corporate bonds, while demanding shares offer earnings yields close to 10%.Then something in the collective psyche shifted and the cult of equity took off. Shares’ promise of dizzying profits trumped the fixed income on bonds; investors poured money into the stockmarket; valuations soared and so did returns. The ballooning venture-capital industry vividly demonstrated the riches early ownership of high-growth firms could bring. Since 1900, crashes notwithstanding, the annualised real returns on American shares have been 6.5%, compared with 5.3% for corporate bonds.Over the past ten years the divergence of the two markets has continued apace. Investment-grade bonds issued by American firms were worth $7.5trn in 2014, compared with $19trn for shares in firms in the & 500 index. Now the two figures are $11trn and $52trn, respectively. The bond market’s value, then 39% of that for stocks, is now 22%. Issuance volumes hint at a continuing decline. Although 2024 was the busiest year in several, in real terms its $1.6trn of newly minted bonds was below the annual average for the preceding decade. The market is less attractive than it appears.This is down to more than changing tastes among investors in recent decades. The tech titans that have sent share prices soaring are less suited to issuing bonds than the corporate behemoths that preceded them. They generate torrents of cash, so have less need to raise capital from debt. What is more, their assets are largely intangible rather than the tangible sort against which bonds can be secured: intellectual property as opposed to factory machinery.Could the corporate bond rise again? It is only natural that, as young and innovative companies have come to dominate markets, investors have wanted equity stakes in their growth. As such firms mature, and their profits rise more slowly, maybe their debt will look comparatively more attractive. They might also have more cause to issue it, as they plough ever more capital into the infrastructure that powers artificial intelligence. Last year Meta, the social-media conglomerate, sold bonds worth $10.5bn, its biggest issuance to date. Maybe investors will regain the enthusiasm they held for the asset class in decades gone by. More likely, though, they will hunt for the shares of tomorrow’s giants.
