The last time the Federal Reserve was raising rates, corporate bonds got hit harder than Treasurys, and anyone who owned a bond fund in 2022 remembers the statement. So it’s fair to ask, one hike into a new cycle, whether it’s about to happen again. Telis Demos, in Monday’s Heard on the Street, says probably not — and his reasons double as a checklist for what would make him wrong.
First, the scar. In 2022 the Fed lifted its target by more than 4 percentage points in a single year. Top-rated corporates returned about −15% (ICE BofA U.S. Corporate index), worse than Treasurys’ roughly −13%, because corporates took two hits: rates rose, and the credit spread — the extra yield investors demand over government bonds for default risk — widened from about 1 point at the end of 2021 to about 1.7 points. Spreads have since narrowed to below where that cycle began, which is why they look vulnerable now.
Why 2026 may not rhyme with 2022
Demos’s case rests on three things. The Fed’s tightening from here should be slower and smaller; several Fed officials forecast one more quarter-point hike this year. Companies have lived in a higher-rate world for a few years and issued bonds at yields near today’s, so an increase shouldn’t bite the way it did when borrowing cost nearly nothing. And tight spreads and high yields can coexist: in 1997, when the Fed raised its target from 5.25% to 5.5%, spreads fell under 0.6 point. JPMorgan Chase’s (JPM) Nathaniel Rosenbaum says today’s tight spreads aren’t abnormal given the level of yields.
The wild card is the AI borrowers. Spreads on investment-grade hyperscaler bonds — Alphabet (GOOGL), Amazon.com (AMZN), Meta Platforms (META), Microsoft (MSFT) — have widened more than a quarter point this year, per JPMorgan, partly because nobody expected the size of the borrowing: Bank of America (BAC) now forecasts well over $300 billion of debt issuance from the four this year, far more than investors expected in May. From here BofA sees that issuance declining for two years, and Pimco’s Lotfi Karoui argues an AI spending pullback could, oddly, help their bonds. “Capex falls, free cash flow recovers, and the issuance pipeline shrinks,” he wrote. The caveat: if the Fed moves sharply beyond the forecast, spreads widen again.
Our read
Fixed Income (IN02): income investors don’t need to abandon high-grade corporates, and the desk’s stance is hold. But look at what you’re being paid for. Friday’s Bloomberg U.S. Aggregate — Treasurys, mortgage bonds and high-grade corporates together — yielded 5.32% at a spread of just 28 basis points over Treasurys, and the column notes that high-grade corporate spreads have narrowed below the roughly 1 point where the 2022 cycle began. Either way, most of the yield is rates, not credit — which is the point of high-grade paper, as long as you don’t reach down in quality to make up the difference. The ICE BofA High Yield 100 yields 6.845% at 192 basis points, near the low of its 183–298 range; about 1.5 points more than the Aggregate isn’t much for owning junk into a hiking cycle.
The practical shape is a ladder: stagger maturities so a piece comes due every year, keep quality high, and let the roll-off reinvest at whatever the Fed does next instead of guessing. And mind the gap nobody closes: Bankrate’s average bank money-market account pays 0.44%, while the latest 13-week Treasury bill auctioned at 3.970%, backed by the U.S. government and with next to no price risk. That gap is real money every year, and closing it is the easiest fifteen minutes in personal finance. Bring the statement.