Pedestrians outside the New York Stock Exchange in New York City on October 1, 2025. Photographer: Michael Nagle/Bloomberg.
U.S. corporate bonds are trading at their highest valuations in decades, but to some investors and strategists, it’s partly an illusion fueled by government dysfunction and company debt has room to rally more.
The gap between yields on blue-chip company debt and U.S. Treasuries, a key valuation metric for corporate credit known as the spread, has hovered around 0.73 percentage point for much of the past week. That’s close to levels last seen in the 1990s. Typically, it’s a signal investors are confident that firms will be able to pay their obligations.
But those high valuations are at least partly a function of rising risk for U.S. Treasuries, according to TD Securities USA strategist Hans Mikkelsen. A series of factors have increased Treasuries’ risk: The U.S. is weeks into a government shutdown. Republican tax cuts are forcing the United States to borrow more. The Federal Reserve is under political pressure to cut interest rates, even amid signs that inflation isn’t completely tamed. Then there’s a debt-ceiling battle potentially brewing in 2027, at a time when political parties are polarized, raising the risk that the government will delay paying its obligations.
“We’re seeing some concerns that in some dimensions the U.S. government is moving more in the direction of emerging markets,” Mikkelsen said, adding that demand for company debt remains strong.
Treasuries look so much riskier that some on Wall Street are questioning whether they remain the best benchmark for corporate bonds. Investors looking to remove some political and government factors from the equation have been using interest rate swaps as a reference rate, according to JPMorgan Chase & Co. By that measure, corporate bonds look less richly valued: Spreads for high-grade corporate bonds compared with swaps are about 1.52 percentage point, closer to levels they’ve been at for the last few years.
If current trends continue, spreads on the safest corporate debt—such as bonds from Microsoft Corp.—are at risk of turning negative, Mikkelsen said. This happens in emerging markets when solid firms are judged to be safer than their own country’s sovereign debt.
“Treasuries are no longer that risk-free indicator,” said Itai Lourie, chief investment officer at Thresher Fixed LLC. “If I were to pick a benchmark, I would use swaps. The swap curve is more continuous and there are less technical abnormalities we see than in the Treasury curves.”
There are flaws to using interest rate derivatives as a benchmark. Interest rate swaps aren’t completely free of credit risk, and pivoting to a new benchmark may just be obscuring potential difficulty in credit markets, where plenty of observers have warned against complacency. Defaults are growing among junk-rated borrowers, and there are signs of corporate cash levels starting to fall.
“If you move the goalpost—if you call the 0-yard line the 10-yard line like they do in Canada—will there be more room to run?” said Darrell Duffie, a professor of finance at Stanford University. Still, Duffie joins other market watchers in viewing swap rates as a useful benchmark.
On the whole, U.S. companies look relatively strong now. They’ve been boosting their earnings relative to their debt levels, making corporate debt a more attractive option for some investors. As quarterly earnings reporting kicks off in earnest next week, Goldman Sachs Group Inc. is anticipating better-than-expected results from corporate America amid a robust economy and a rosy outlook for artificial intelligence (AI).
TD’s Mikkelsen believes the debate can be summed up with a hypothetical choice between two bonds—one from the AA+ rated U.S. Treasury and one from a triple-A rated corporate like Microsoft. Both bonds mature in the first quarter of 2027, when the debt-ceiling battle is expected to be raging. “With a Treasury, if there’s a hiccup with the debt ceiling that needs to be resolved, then you might not get your money,” Mikkelsen said. “If you buy a bond from Microsoft, which is higher-rated, you have to consider there’s a higher chance you get your money back when you need it.”
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