Goldman Sachs: Higher Treasury Yields Keep Credit Attractive Despite Tight Spreads

Elevated US Treasury yields have supported strong demand for USD credit by allowing pensions, insurers and foreign investors to meet all-in yield targets even with relatively tight credit spreads. In US investment-grade credit, spreads now account for less than 15% of total yield, compared with roughly 45% on average from 2019 to 2021. In high yield, spreads contribute around 37% of all-in yield versus about 75% previously. The same shift is even more pronounced in Europe, where sovereign yields have risen sharply from the negative-rate environment of several years ago. As a result, much of the return available in corporate bonds is increasingly being driven by the risk-free component rather than credit risk, leading parts of the credit market to behave more like a quasi-rates product.