(Bloomberg) — Investors are showing signs of pulling money out of government bonds and plowing it into US and European company debt.
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If the moves persist, money managers could be shifting what for decades has been market orthodoxy: that nothing is safer than buying US government debt. But as US fiscal deficits climb, hurt by tax cuts and rising interest costs, the government may look to borrow more, and company debt may be the safer option.
In June, money managers pulled $3.9 billion from Treasuries, while adding $10 billion to European and US investment-grade corporate debt, according to EPFR Global data. In July, investors have added another $13 billion to US high-grade corporates, the largest net client purchasing in data going back to 2015, according to a separate note from strategists at Barclays on Friday.
Michaël Nizard, a portfolio manager at Edmond de Rothschild Asset Management, started making the switch from government into corporate debt at the end of last year and is holding on to the position.
And in a note in the latest week, BlackRock Inc. strategists wrote, “Credit has become a clear choice for quality.”
To the extent this shift is happening, it’s a slow change. The US doesn’t have foreign currency debt, and can print more dollars as it needs to. When money managers were alarmed about tariff wars in April, US Treasuries still performed better than corporate bonds, even if prices for both sectors broadly fell. And foreign demand for Treasuries has remained resilient, with holdings climbing in May.
But tightening corporate bond spreads in recent months may be a function of government debt looking relatively weaker now. The US government lost its last triple A grade in May, when Moody’s Ratings cut it to Aa1. The bond rater pointed to factors including the widening deficit and the rising burden of interest, noting that payments will likely absorb around 30% of revenue by 2035, compared with 18% in 2024 and 9% in 2021.
And US President Donald Trump’s sweeping tax cut bill could add about $3.4 trillion to US deficits over the next decade, according to projections from the nonpartisan Congressional Budget Office.
At the same time, corporate profits remain relatively strong, and although there are some early reasons for caution, high-grade companies are generally generating enough earnings to easily pay their interest now. More US companies are topping earnings estimates this reporting season than the same period last year.
Valuations for company debt have been high recently, reflecting investor demand for the debt. High-grade US corporate spreads have averaged below 0.8 percentage point, or 80 basis points, in July through Thursday. That’s far below the mean for the decade of about 120 basis points, according to Bloomberg index data. Spreads for euro-denominated high-grade corporates have averaged about 85 basis points in July, compared with about 123 basis points for the decade.
To some money managers, high valuations for corporate credit are cause to be wary. Gershon Distenfeld, a fund manager at AllianceBernstein Holding LP, pared back a position that favored credit risk to rates risk earlier this month. Dominique Braeuninger, a multi-asset fund manager at Schroders Investment Management Ltd., agrees that corporate bond spreads are too tight to make them attractive.
And even if BlackRock is generally positive on corporate debt, it is underweight long-term high-grade notes because spreads are tight, while being overweight short-term credit.
But to many market observers, the world appears to be shifting, and it makes sense to hold more corporate debt now.
“What we’ve seen on the government fiscal side is not great news,” said Jason Simpson, a senior fixed income SPDR ETF strategist at State Street Investment Management. “Corporates seem to be chugging along nicely.”
Week In Review
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The US leveraged loan market saw more than $83 billion of launches in the latest week, the second busiest on record, including a $7.57 billion two-part deal from Medline that is set to be the market’s biggest pricing since 2015. Repricings were an important driver of volume, representing about two thirds of the tranches, as companies look to cut borrowing costs.
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Many of the loans that were repriced had already been repriced before
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The return of billion-dollar M&A deals was supposed to be a boon for Wall Street’s leveraged finance desks. It’s turning out to be anything but, as private equity cuts them out of many of the most coveted deals.
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Lenders are demanding higher pricing from two European leveraged-loan borrowers, a rare sign of difficulty these days in the buoyant market for sub-investment grade debt.
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Chinese developer Country Garden Holdings Co. has agreed to some key restructuring terms a group of bank creditors had demanded, potentially easing the path for an overall debt deal.
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PepsiCo Inc. sold $4.7 billion of bonds in a pair of offerings that included the longest-dated euro-denominated corporate new issue since February. FedEx Corp. followed Pepsi with a rare two-part euro debt sale as some of its existing notes in the single currency near maturity. Meanwhile, General Electric Co. sold $2 billion of investment-grade bonds, as did Lockheed Martin Corp.
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Saks Global Enterprises launched a debt exchange after weeks of negotiations with creditors as its $600 million fresh financing takes shape. Separately, Walgreens Boots Alliance Inc. launched a multi-currency debt tender.
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Banks led by UBS Group and Citigroup have offloaded about $2 billion of debt to support Patient Square Capital’s acquisition of Patterson Cos., reviving a deal more than three months after the bonds and loans got stuck on their books due to tariff turmoil in the market.
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Dog walking service Wag! Group Co. won court permission to try to slash debt and hand control to senior creditor Retriever LLC as early as next month.
On the Move
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Carlyle Group Inc. recruited Alex Chi, who was most recently co-head of Americas private credit at Goldman Sachs Group Inc.’s asset management arm, to lead its direct lending business. Chi will join Carlyle in early 2026.
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BMO Capital Markets hired Nii Dodoo as head of private credit financing. Dodoo joins from BTIG, where he was a managing director.
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Christina Chan, BNP Paribas’ regional head of loan sales and head of corporate loan syndicate, Asia Pacific, has left the bank.
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Toronto-Dominion Bank’s US credit trading unit has re-hired Sarah Classen from Goldman Sachs Group Inc. for its voice-trading business. Classen starts in mid-September as a director in TD Securities’ global US dollar fixed income trading team, based in New York.
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Ares Management Corp. hired Sarah Cole as a partner and co-head of Ares Global Capital Solutions to bolster its partnerships with banks, insurance companies and across capital markets broadly.
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Hedge fund Squarepoint Capital LLP recruited Nathan Fabius, a former strategist at Goldman Sachs Group Inc., to cover Latin American debt. Fabius joined Squarepoint this month and is based in New York.
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Jefferies Financial Group Inc. plans to double the number of people on its credit secondaries team by the end of 2025, as demand has surged from investors who want to buy and sell existing exposure amid a dearth of fresh deals.
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Ardagh Group SA creditors are set to pay billionaire owner Paul Coulson as much as $300 million as part of a deal to hand over the keys to the company.
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