US corporate bonds attract investors as stock market turbulence grows

By Davide Barbuscia

US corporate bonds have been rallying in recent weeks, drawing the attention of money managers seeking shelter from turbulence in stocks. 

High-grade US company debt gained 1.2% from the end of September through Friday’s close, according to Bloomberg Index total return data. The S&P 500 fell about 1.1% during that period, including dividends, with Nvidia Corp.’s woes this week reminding investors how fragile the market can be. Yields on investment-grade corporate bonds averaged 6% on Friday, near the highest levels since the financial crisis, giving investors a chance to potentially lock in solid income for years.  

Meanwhile, although the S&P 500 has essentially doubled since 2023, its momentum is showing signs of flagging. The index is up about 11.5% this year including dividends. That’s around two-thirds of its gain for all of 2025, as worries over the sustainability of the artificial intelligence trade and higher interest rates have dented risk appetite in recent weeks.

“If you’re thinking that we have additional pullback to go in equity land, and you’re comparing that to the known yield and income level of fixed income, bonds begin to look more attractive,” said Karen Manna, fixed income investment strategist at Federated Hermes.

Democrats swept key midterm races earlier this month, taking both chambers of Congress and several governorships in Republican strongholds. The election results triggered a sharp stock selloff as investors dumped technology shares on expectations of tighter congressional scrutiny of data center development and the tech industry more broadly. If data centers grow more slowly, profit growth could lag, weighing on stocks. 

At the same time, slower development for these projects could cut into the amount of bonds that tech companies sell to fund their investments, potentially helping corporate bond returns. And tech companies seem to be slowing down their bond sales anyway as investors reach their limits for how much debt they can take from individual corporations. The end result is the potential for US high-grade corporate bond sales to moderate next year after growing 28% this year through Thursday and reaching a full-year record. 

US high-grade corporate bond issuance could decline next year to $1.9 trillion from an expected $2.1 trillion this year, partly because the AI boom is increasingly getting financed via a wide range of markets in addition to corporate bonds, according to Bank of America Corp. strategists including Yuri Seliger.  

Amid lower issuance, Manulife Investment Management expects US large-cap stocks to return 6% annually over the next five years, against 5.1% annual returns for US investment grade credit. Adjusting the risk of the returns in equities, high-grade credit appears relatively attractive, said Nathan Thooft, chief investment officer of Manulife Investment Management’s multi-asset solutions team.

Part of the appeal for high-grade corporate debt lies in yields that remain near multi-year highs after starting the year at around 4.8%. The US consumer price index report this week signaled that inflation still remains a problem, a concern that has helped push up bond yields all year across fixed-income markets. 

While higher yields have periodically weighed on stocks, they have also pushed some investors to increase bond allocations. Ruffer, an investment firm based in London, has doubled its portfolio duration since July to the highest level in more than two years, by increasing its fixed income exposure, said Oli Shale, US investment specialist at the firm, via email. 

“The move is to protect against a slowdown in the AI buildout that may hurt economic growth and pressure US stocks, and to also capture an attractive yield,” according to Shale. 

Supply Fears?

One market that big tech companies are increasingly tapping is chip financings, which can often end up in the investment grade market. Some bond sales backed by computing power are already in the works, and while the debt is often initially arranged in private markets and by banks, it could be refinanced with bonds next year.

For instance, banks are planning to sell up to about $21 billion of high-grade bonds next year as part of a $63 billion funding package that Broadcom Inc. has pulled together to help finance chips for AI developer Anthropic PBC. 

“Chip financing into 2027 is certainly expected to pick up and can weigh on credit a bit,” said said Anthony Woodside, head of multi-sector fixed income and investment strategy at L&G — Asset Management, America. He generally thinks high-grade credit looks attractive now given yields and the potential for declining supply. 

It’s unclear whether equities will fall next year, or if corporate bonds will suffer. But with tech companies potentially borrowing less, the bonds could see US corporate risk premiums continue to tighten after narrowing five basis points, or 0.05 percentage point, in the latest week. Spreads averaged 86 basis points on Friday, a bit wider than the year’s mean but still relatively tight by the standards of the last two decades.     

“A combination of more volatility in equity markets, plus some supply in credit coming off the table, and the fact that absolute yields are higher, is a recipe for decent return potential in credit,” Manulife’s Thooft said.