Corporate Credit Spreads Narrowing Amidst Improving Profit Growth and Creditworthiness

Credit spreads are compressing due to robust corporate profit growth and improving creditworthiness, contrasting with government finances facing stretched budget deficits. The US corporate earnings season is strong, with analysts raising full-year S&P 500 index estimates. Corporate debt has benefited from low interest rates and quantitative easing, allowing companies to invest in higher-yielding Treasury bonds. Bank of America Corp. analysts note that only 0.7% of investment-grade firms have defaulted over the past 25 years, with most failures occurring during the 2008 global financial crisis.

Credit spreads, the difference between the yields of corporate bonds and government bonds, have been compressing due to robust corporate profit growth and improving creditworthiness. This trend contrasts sharply with the stretched budget deficits faced by governments worldwide.

The second-quarter US earnings season has been particularly strong, with a 5.6% beat on prior forecasts, according to DataTrek Research LLC. More than 80% of firms reporting so far have outpaced estimates, the highest rate in four years. This widespread improvement in corporate profit outlook has been driven by a variety of factors, including the Federal Reserve's low-interest rate policy and quantitative easing programs [1].

Corporate debt has benefited significantly from these low-interest rates and monetary stimulus. Companies have been able to invest in higher-yielding Treasury bonds, further enhancing their financial health. Albert Edwards, a strategist at Societe Generale SA, notes that companies and banks can now invest plentiful balance sheet liquidity at higher Treasury yields than their own financing costs [1].

The resilience of corporate credit is evident in the low default rates. Bank of America Corp. analysts report that over the past 25 years, only 0.7% of investment-grade firms have defaulted, with the majority of these failures occurring during the 2008 global financial crisis [1]. This almost too benign credit risk appetite reflects the strong financial health of corporations.

In contrast, government finances are facing increasing challenges. The US government's borrowing splurge has led Moody's Ratings to downgrade its US sovereign rating to Aa1 in May 2025, citing a "mind-numbing" $37 trillion debt burden [1]. This fiscal stress is mirrored across many developed economies, where government debt assets are looking increasingly tarnished.

Investors are taking notice of the contrasting financial health of corporations and governments. They are pouring more cash into high-quality corporate credit, even with ongoing US tariff confusion. Top-rated debt is perceived to offer more of a haven than government markets [1].

In Singapore, DBS Bank reported a 1% year-over-year increase in net profit for the second quarter, totaling SGD 2.82 billion. The bank also announced an ordinary dividend of SGD 0.60 and a Capital Return dividend of SGD 0.15 per share for the quarter [2]. This strong performance is driven by robust deposit growth and proactive balance sheet hedging, indicating the resilience of the banking sector.

As the second quarter earnings season winds down, the overall results have been mostly positive. Data from FactSet shows that analysts expect S&P 500 companies to report an 11.8% jump in earnings per share during the second quarter [3]. This strong earnings season underscores the overall health of the corporate sector.

In conclusion, the compressing credit spreads reflect the robust financial health of corporations, contrasting with the fiscal challenges faced by governments. As corporate creditworthiness improves and government finances face increasing stress, investors are increasingly turning to high-quality corporate debt for returns.

References:
[1] https://www.bloomberg.com/opinion/articles/2025-08-13/credit-spreads-aren-t-hiding-a-market-timebomb
[2] https://growbeansprout.com/dbs-1h25-profit-dividend
[3] https://finance.yahoo.com/news/live/earnings-live-circle-pops-on-higher-revenue-in-first-earnings-report-on-stock-surges-204250651.html