In a strong display of investor confidence, US investment-grade corporate bond spreads have tightened to levels not seen in more than three years, underscoring bullish sentiment in the credit market despite a backdrop of growing macroeconomic and geopolitical risks.

According to Bloomberg data, average high-grade bond spreads — the additional yield investors demand for holding corporate debt over US Treasuries — narrowed by four basis points last Friday, closing at 83 basis points. This marks the lowest spread since September 2021. Such tightening is a clear sign that investors remain optimistic about corporate credit, even in the face of potential challenges on the horizon.

What’s Driving This Optimism?

Several factors are contributing to this narrowing of spreads. First, there has been strong demand from investors seeking refuge from the volatility in US Treasuries, opting instead for the relative safety of short and intermediate-term investment-grade bonds. The expectation that the Federal Reserve will soon pivot to cutting interest rates is also playing a key role, as lower rates typically make fixed-income investments more attractive. Additionally, a slowdown in bond issuance has created a scarcity effect, helping to keep spreads tight.

While macroeconomic uncertainties like inflation and geopolitical tensions remain, these factors have yet to significantly dampen investor enthusiasm in the credit markets.

Key Stock Market Movements to Watch

As bond spreads narrow, several notable companies saw significant stock movements last week, driven by analyst downgrades and upgrades. Here are the key players:

• Apple: The tech giant saw its shares decline 1.4% after Jefferies downgraded the stock from “buy” to “hold.” The firm noted that expectations for upcoming iPhone models — the iPhone 16 and 17 — might be too high, following weaker-than-anticipated demand for current models. Jefferies also downplayed Apple’s AI capabilities, suggesting that the next wave of smartphone replacements may not be as imminent as some expect.
• NXP Semiconductor: In contrast, NXP Semiconductor enjoyed a 0.8% boost after UBS upgraded the stock to “buy.” UBS cited healthy inventory levels and the company’s strong margin resilience as reasons for the upgrade, indicating optimism in the semiconductor space despite broader industry challenges.
• Amazon: Shares of Amazon dropped nearly 2% following a downgrade by Wells Fargo from “overweight” to “equal weight.” The bank expressed concerns over slowing growth and rising competition, particularly from Walmart, which is increasingly positioning itself as a formidable rival in e-commerce.
• Pfizer: Activist investor Starboard Value made headlines after taking a significant $1 billion stake in Pfizer, a move aimed at driving a turnaround for the struggling pharmaceutical company. The news pushed Pfizer’s stock up nearly 3%, as investors speculated on potential strategic changes at the company.
• Hershey: The chocolate maker dipped 1% following downgrades from UBS and Bernstein. UBS cited rising cocoa prices as a challenge to Hershey’s 2025 outlook, while Bernstein pointed to potential headwinds from the growing use of GLP-1 drugs, which are associated with appetite suppression and could impact the company’s confectionary sales.
• American Express: American Express shares fell more than 1% after JPMorgan downgraded the stock to “neutral” from “overweight.” JPMorgan’s analysts believe that while AmEx’s valuation is high, its potential for future upside is limited in the current market environment.

Despite growing uncertainties, the corporate bond market continues to show resilience, with investment-grade spreads tightening as demand remains robust. While stock market performance varied last week — with companies like Apple, Amazon, and Hershey experiencing downgrades — there are signs of confidence in specific sectors, such as semiconductors and pharmaceuticals.

As investors keep a close eye on the Federal Reserve’s next moves and potential geopolitical flare-ups, the credit market’s strong performance offers an encouraging signal, suggesting that there may still be room for optimism in today’s investment landscape.