Hello everyone, it is no secret:
- the United States’ fiscal and budgetary situation is far from desirable, and
- its tariff policy remains erratic.
- Added to this are persistent concerns about inflation and the potential deterioration of the labor market.
The Federal Reserve, the Fed, finds itself caught between a rock and a hard place, as these various issues require different policy responses.
And how are financial markets reacting to these signals? Well, it depends on the asset class.
Equity markets are soaring to new record highs, pricing in a low probability of recession while anticipating additional support from the Fed.
This optimism is not shared by the bond markets. The yield on the 30-year U.S. Treasury is flirting with 5%—a level not seen since 2007, except for a brief period in 2023.
A rise in long-term yields is not necessarily a negative development when the outlook is clear and growth is strong, but it takes on a different meaning when driven by concerns, particularly about debt levels.
So how are bond investors responding to this rise—do they see it as an opportunity or a warning sign?
For now, they are focused on yield levels not seen in years. Long-term Treasuries are out of favor, but corporate bonds are enjoying strong demand.
Since early May, many issuers such as Siemens, AT&T, Alphabet, Caterpillar, and Saudi Aramco have taken advantage of investor appetite for ultra-long maturities. For example, Aramco issued 5 billion dollars split across three maturities, including $2.25 billion at 30 years.
While corporate credit spreads have continued to tighten and are now near their lowest levels in the past 20 years, they remain attractive. In Aramco’s case, the spread was +155 basis points over the 30-year U.S. Treasury, translating into a yield of 6.51%—an absolute level that attracted many investors.
Aramco had already issued $9 billion in debt in 2024, yet its leverage ratio remains low, both in absolute and relative terms (5.3%, compared to 19% for Shell and 26% for BP). However, not everything is rosy: even though its production costs are among the lowest in the sector ($5/barrel), its free cash flow (FCF) has not been sufficient to cover its dividend payments, even after a downward revision.
Investors remain though confident, as evidenced by order book and concession premiums analysis: at this stage, issuers are clearly in the driver’s seat. Investors are tempted by the prospect of high coupons, but the “crow” has become wiser and now releases only small pieces at a time.
Concession premiums reflect this:
- from an average of +2.3 basis points in January,
- they soared to 13 basis points in April and
- have now fallen into negative territory at -1 basis point.
The evolution of order books has been inversely proportional.
For now, credit markets appear immune and are displaying an optimism reminiscent of equity markets. Whether they will maintain this resilience if volatility picks up remains to be seen.
