The desk interprets the current dynamics in the US bond market as indicative of strong demand amid robust supply, particularly driven by domestic investors' appetite for longer-duration Treasuries. Per the full note source, this trend is supported by attractive yields and a reduction in risk delivery from the US Treasury, which has created a conducive environment for credit absorption. Our analysis aligns with the broader market sentiment, as we see consensus targets reflecting a stable outlook for US yields. However, the absence of high-impact events on the calendar suggests a quieter trading environment ahead.
What the desk is arguing
BofA Global Research highlights that credit markets have absorbed strong supply effectively, supported by a significant reduction in risk delivery from the US Treasury to the private sector. Inflows remain robust due to attractive yields and recently lower rate volatility. Additionally, there is a growing appetite among domestic investors to extend duration along the UST curve.
Where it sits in our coverage
Our internal coverage does not include specific targets or spread data for this market view, as the commentary focuses on supply-demand dynamics rather than rate forecasts. We categorize this as a neutral-to-bullish stance on credit and duration, aligning with a constructive view on fixed income.
How other firms see it
No other firm commentary is available for this topic.
Key takeaways
01Credit supply has been well absorbed, helped by reduced Treasury risk delivery and robust inflows.
02Investor appetite is growing for extending along the UST curve, particularly among domestic investors.
03Attractive yields and lower rate volatility are supporting inflows into bond markets.
Market implications
Continued strong demand for credit and duration could support tighter credit spreads and lower long-end yields. This may benefit long-duration bonds and credit-sensitive assets.
Risks to this view
A resurgence in rate volatility or a shift in Treasury issuance could disrupt the absorption of supply. Reduced risk delivery from Treasury may not persist, potentially tightening financial conditions.
Hello, and welcome to Global Research Unlocked, the interest rate and FX series. This podcast is based on our weekly client conference call where our strategists, along with guests from other parts of BYA Global Research, discuss the most topical and pressing questions faced by our market. I'm Ralf Preusser, head of Global G10 rates and FX strategy.
Today's Friday, 20th of February. I'm joined today by Yuri Seliger, head of high-grade credit strategy, and by Megan Zweiber from our US rate strategy team. Thank you both for joining.
Yuri, first time on this call, I believe. What was the biggest concern for credit investors going into this year? Yes, thank you, Ralf, and I'm very happy to be on the call.
Just to answer your question directly, it was supply, or more specifically, technicals in the bond market. And recall that going into the year, the outlook for the macro in general was very benign. We were expecting pretty strong growth, specifically in the US, default rates were low.
But what happened, of course, late in 2025 was this big uptick in hyperscaler issuance. And just to put some numbers on this, in 2024, the five companies that we now call hyperscalers issued $17 billion in total. And then between September and November of last year, in 2025, that issuance jumped to $108 billion, massive increase.
And of course, such an unexpected kind of jump in supply had a pretty material impact on valuations. This very material increase in hyperscaler supply certainly had a large impact on spread as well. Another concern was that these large companies typically give very limited kind of guidance in terms of how much they will issue, when they will issue.
When this unexpectedly, surprisingly large supply hit the markets, these companies continue to provide little guidance. People were really just guessing as to how much more supply could come. We ran a survey recently of investors and there's still a pretty big range of how much hyperscaler supply could come this year, anywhere between 100 to 300 billion is where most investors ended up.
And then on top of that, we're also expecting more issuance to fund M&A. Putting it all together, the biggest concern was that we have this big potential supply coming, we don't know exactly how much, and that could really impact technicals as we saw late in 2025. How much issuance have you actually seen yet today?
I think those concerns were justified. January supply was $223 billion for US IG, so that was the record issuance for the month of January. In terms of year-to-date issuance, it now stands at $349 billion.
That's up 17% over the same period last year. Just to put things in perspective, we were calling for an overall increase in supply for the full year in IG of about 11%. So 17% is certainly more than we expected for the full year.
That probably means that it's front-loaded. Yeah, I would say we expected stronger supply or heavier supply, and we're seeing something that's even heavier than expected. What's the market impact been?
That was another big surprise. As we discussed, coming into the year, everybody was really concerned about the technicals of the market due to the heavy supply, mostly. And I think the big surprise was that what we actually saw, especially in January, was instead very strong technicals, despite heavy volumes.
Again, the best way to illustrate that is probably by looking at spreads. The spread on the IG Bloomberg Index set new cyclical tides in the middle of January at 71 basis points, and that's a pretty significant seven basis points tighter on the year in the context of issuance, as I mentioned, coming in heavy and presumably even heavier than I think people expected. Again, the obvious explanation for that is demand.
Even though supply did surprise to the upside, as we expected, the big surprise was actually demand. Demand was extremely strong, pushing spreads to the new tides. Let's come back to the demand story in a second.
Megan, sticking with the supply story, how does that compare the IG picture that Yuri is describing with what we're seeing in the Treasury market? Yes, we wrote about this last year. If you look at the amount of core bond net issuance that we would see across IG, MBS, and Treasuries, we were expecting this to be about $600 billion lower versus what we saw last year.
A big part of that decline in net supply is really stemming from the Treasury market. While Treasury is holding gross auction sizes unchanged versus last year, we're looking at larger maturities in the Treasury market this year. We're also seeing the Treasury Department do a larger clip of buyback operations.
The amount of net supply that we're going to get across these three categories is extremely important. Overall, it's declining by about $600 billion. As we'll discuss, this is an important category to think about for a lot of asset managers, the amount of supply that we see across all three of these categories.
Thanks, Megan. Coming back to you, how much of the demand story for credit do you think is due to the fact that there has been this lack of risk supply from Treasury? It's hard to say exactly.
I'm sure it's contributing, but in addition to lower net supply of core bonds in the market, we also have other sources of demand and some of those developed this year. I would say one was this announcement of MBS purchases by the administration. The impact on us specifically is the fact that IG corporates were screening very rich to agency MBS in 2025, which reduced demand for corporates and increased demand for agency MBS.
After the announcement, we're no longer screen rich, so I think that should be good for demand. Then another source of demand for IG is just very strong inflows to the bond market. There are many sources of that, but one source that we can actually track in real time are mutual funds and ETFs.
And those inflows so far in 2026 are up 50% relative to the pace we saw in the second half of 2025. Then smaller net supply certainly matters, but also on top of that, we also see stronger demand. Thank you.
Megan, what about demand for treasuries? What inflows are we seeing? Time zone analysis suggests that much of the decline that we've seen in U.S. rates since the start of the year has occurred during the New York trading session as opposed to London and Tokyo trading sessions.
In general, I believe that a lot of the decline that we're seeing in rates, a lot of this pickup in demand is really stemming from domestic investors. And complementing what Yuri just noted, if you look at the amount of inflows that we're seeing into core bond funds, they're at more than double the pace of flows that we've seen on average over the past 52 weeks, which was already historically quite elevated. I think it has indeed been a big part of the story, these inflows that we're seeing into core bond funds that they then have to go out and invest in the combination of treasuries, MBS, IG.
If you're looking at these core bond funds benchmark allocations, about half of that benchmark allocation is specifically into treasuries. So I believe in general, a big part of this buyer base that we're seeing come in and step in is largely attributed to domestic investors. Overall, Ralph, it feels like we're in this environment of actually better improving demand alongside lower net supply across these three buyer bases, really pushing back on a lot of this concern around de-dollarization flows from the treasury market, from foreign investors, and really pushing back on this concept that hyperscaler issuance is really going to challenge bond markets overall.
Thank you. The other interesting bit that seems to be going on in the treasury market is a bit of a curve extension trade. What do you think is driving that?
Sure, Ralph. I think that there's probably three core themes that are going on that investors are trading and are driving this duration extension. The first one is lower Fed independence worries.
Our FX and rate sentiment survey has suggested for some time now that the steepener has been one of the more popular ways to trade Fed independence risk from global investors. And the Warsh nomination and Cook case arguments have likely moderated some of these concerns. The second one here is reduced US fiscal risks.
In addition to lower deficit expectations that we have right now, treasuries holding auction sizes stable and TBAX guidance to eventually grow coupon supply really at the belly of the curve reduces the likelihood of a fiscal-driven bear steepener. The IEPA decision, when we do eventually get it, we have a decision day this morning, is a risk and we think could drive a modest bear steepening of the curve, but we would really fade any meaningful long-run sell-off in our view. US duration providing a better diversification benefit is also likely one reason as well.
What we saw last April, an important thing that we saw from a flow perspective is that with the front end of the curve really rallying alongside the very significant equity declines we saw around Liberation Day and backend selling off, we had multi-asset investors pivot on the curve in terms of where they were holding duration. They moved any of their allocations to the backend for diversification properties really to the front end and belly of the curve. In recent sessions, we've seen that the backend has once again proven a better diversifier versus risk.
The diversification benefit of 30s has actually converged closer to the diversification benefit of 2s. Investors are probably looking across the curve and saying, let's move out to a place where we can accomplish better carry and roll. With concerns that equity markets are just going to deliver less return than expected this year, it's driven some reallocation out the curve from both the field return perspective and then also for a better diversification benefit out there than what we were looking at, say, this time last year.
Thank you. Joeri, coming back to you. We've talked about supply.
We've talked about demand. How would you describe conditions in the credit market more generally? Yes, sure.
The conditions in the credit markets, I would say, are just very strong. It's really a function of two things. One is obviously demand.
We've talked about it for a while now. One thing I would just add from a credit perspective angle is that spreads, as I mentioned, are neocyclical types. Most investors view credit spreads as very overvalued.
But the reason why they buy is because the all-in yield is still very attractive. That all-in yield for IG is close to 5%. A lot of investors find that generates a lot of demand from investors.
And then the second reason for strong market conditions is just the quality of balance sheets, which allows investors to buy credit. They're not worried about buying credit. The reason for that is balance sheet quality, specifically in IG, usually trends lower.
It gets worse over time. But we just went through a very unusual period of actually improving credit quality in IG. Now, credit quality, counterintuitively, improves actually only during recessions when company management becomes more defensive and tries to make sure they retain access to market, etc.
Of course, we didn't have a recession, but we had a lot of recession fears when the Fed hiked rates a few years ago. Last year, there was some other volatility related this time to trade. And I think all that uncertainty and volatility, recession fears, kind of prevented companies from re-leveraging and instead led them to make their balances stronger.
For example, we see the share of BBBs, which is the lowest credit quality in IG, dropped to 45% now from something like 52% in 2021. Very strong balance sheets, attractive yield, low default rates, strong demand create very positive conditions in credit. Thank you, Yuri.
Thank you, Megan. Thanks for joining us today. We hope you found this useful and that you'll tune in next week.