This month’s chart illustrates the broad level of demand that we are currently seeing for investment grade credit. While the talk of the town recently has been the step-up in supply related to US technology companies and their funding of artificial intelligence (AI)-related capex, when considering the direction for credit spreads, the other key aspect within a technical framework is to assess the level of demand.

Taking a logical and pragmatic approach is key here. Our chart shows the change in stock of outstanding holdings in the US investment grade bond market. According to the data, the three most important sources of demand are overseas buyers, mutual funds and exchange-traded funds, and life insurance companies.

When analysing this buyer base since 2021, we find that flows are most correlated to yield and return. Flows into mutual funds are most highly correlated with returns (about 65% correlation), while flows from overseas investors—such as European, Japanese and Taiwanese investors as well as Caribbean investment vehicles—are most sensitive to current yields or yields hedged to their domestic currency (about 55%-65% correlation). We also observe a strong correlation between flows into US life insurance companies and market yields (around 80% correlation).

As a result, it is no surprise that due to both positive total returns this year and high yields in credit markets by historical standards, the current demand backdrop for credit is running at elevated levels.

For now, with the US corporate index yield at 4.78% as of 3 December, which is nearer the higher end of its range over the past 20 years, we would expect demand to remain elevated. The direction of travel for supply also looks higher, for the reasons we have discussed, but we think any new supply will be well met with demand.