News & analysis
Goldman: Treasury Yields Now Drive Most of a Corporate Bond's Return
With credit spreads contributing under 15% of investment-grade yield, Goldman Sachs argues corporate bonds increasingly trade as a rates product — a shift that changes what buyers are actually being paid for.
Key points
- Goldman Sachs says investment-grade credit spreads now make up under 15% of all-in yield, versus roughly 45% on average in 2019-2021.
- In high yield, spreads contribute about 37% of yield, down from roughly 75% previously.
- Higher sovereign yields let pensions, insurers and foreign investors hit all-in yield targets despite tight spreads, making corporate bonds behave more like a rates product.
Elevated U.S. Treasury yields have made corporate credit attractive even at historically tight spreads, because the risk-free component now supplies the bulk of the return, Goldman Sachs said. In U.S. investment-grade credit, spreads account for less than 15% of total yield, down from roughly 45% on average between 2019 and 2021. In high yield, spreads contribute about 37% of all-in yield, versus roughly 75% previously.
The mechanism Goldman describes is arithmetic rather than a change in credit quality. A bond's all-in yield is the sum of the risk-free rate and the spread paid for credit risk. When sovereign yields rise sharply, the risk-free term grows while the spread term stays compressed, so the same total yield is composed differently. That is why tight spreads have not deterred buyers: the all-in yield, not the spread, is what many institutions are mandated to hit.
The buyers most exposed to that logic are pensions, insurers and foreign investors, according to Goldman. For these groups, an all-in yield target can be met even when the compensation for default risk is thin, because the government-bond component does the heavy lifting. The same pattern is more pronounced in Europe, where sovereign yields have climbed sharply from the negative-rate environment of several years ago, leaving even less of the total return attributable to credit risk.
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