Despite forecasts of over $2 trillion in corporate bond issuance driven by AI spending, net supply is down 20% year-over-year after accounting for maturities and coupon payments. Record inflows into high-grade funds are effectively absorbing this new debt, keeping the supply/demand dynamic in balance.

With corporate credit spreads at historically narrow levels, investors are not being compensated for the inherent risk. In Richard Bernstein's career, spreads have only been this tight three previous times, each preceding a major credit crisis or market scare (late 1990s, mid-2000s, 2021-22). This suggests a poor entry point for credit.

While default risk exists, the more pressing problem for credit investors is a severe supply-demand imbalance. A shortage of new M&A and corporate issuance, combined with massive sideline capital (e.g., $8T in money markets), keeps spreads historically tight and makes finding attractive opportunities the main challenge.

Today's high-yield market has a fundamentally different, higher-quality composition than before the GFC. The proportion of risky CCC-rated issuers has fallen from nearly 25% to below 10%, which mathematically justifies the current tight spread levels.

Persistently low high-yield credit spreads, despite global turmoil, don't signal corporate health. This is a structural market shift where the riskiest debt has migrated from public markets to the opaque world of private credit, artificially suppressing spreads and hiding true risk.

Despite forecasting a massive surge in bond issuance to fund AI and M&A, Morgan Stanley expects credit spreads to widen only modestly. This is because high-quality, highly-rated companies will lead the issuance, and continued demand from yield-focused buyers should help anchor spreads.

A steep yield curve makes fixed annuities more attractive for consumers. Life insurers sell more of these products and invest the proceeds into spread assets like corporate bonds, creating a powerful, non-obvious demand driver for the credit markets.

Enormous government borrowing is absorbing so much capital that it's crowding out corporate debt issuance, particularly for smaller businesses. This lack of new corporate supply leads to ironically tight credit spreads for large borrowers. This dynamic mirrors the intense concentration seen in public equity markets.

When a steepening yield curve is caused by sticky long-term yields, overall borrowing costs remain high. This discourages companies from issuing new debt, and the reduced supply provides a powerful technical support that helps keep credit spreads tight, even amid macro uncertainty.