Credit Markets Haven't Been This Hot in Two Decades

Global credit markets are showing signs of extreme activity, with corporate debt spreads narrowing to their lowest levels in nearly two decades. A key indicator for global corporate bonds shows spreads have fallen to 103 basis points, the narrowest since June 2007, as investors anticipate rate cuts by central banks and remain optimistic about global economic resilience according to Whale's Book. This trend has extended to speculative-grade bonds, reflecting a broader market rally.

At the same time, private credit markets are seeing significant momentum. Percent, a digital platform for private credit issuance, expects continued growth in asset-based securities in 2026. The firm reported over $532 million in issuance volume in 2025, with asset-based securities accounting for 84% of its issuance. AI infrastructure financing is expected to drive new issuance, as demand for data centers and power capacity intensifies.

Meanwhile, U.S. financial markets have been rattled by President Trump's recent threats to cap credit card interest rates. Trump's directive—calling for a 10% cap—sent shockwaves through Wall Street, with shares of major lenders falling sharply. The proposal could cut billions in profits for the credit card industry and raise broader economic concerns. Analysts remain skeptical, however, as the proposal lacks legislative backing and clear enforcement mechanisms.

Global central banks have responded to the growing pressure on the U.S. Federal Reserve. Bank Indonesia became the first central bank in Southeast Asia to publicly support Fed Chair Jerome Powell, joining others like the European Central Bank and the Bank of England. The support comes after Powell accused the Trump administration of threatening the Fed with criminal charges over its interest rate policies. This marks a rare display of solidarity among central banks and highlights concerns about the erosion of monetary independence.

Why Did This Happen?

The surge in global credit activity is being driven by a combination of low yields and expectations of central bank easing. As interest rates remain high, investors are willing to accept lower risk premiums for corporate and private credit. This is reflected in the record bond issuance seen in early 2026, with U.S. companies alone raising over $435 billion in January.

AI-related capital expenditures are playing a major role in this trend. Major hyperscalers like Amazon, Google, Meta, Microsoft, and Oracle are borrowing at unprecedented levels to fund their AI expansion. In 2025 alone, the Big Five issued $121 billion in corporate bonds, and analysts expect this pace to accelerate in 2026. This has led to a surge in demand for high-grade credit and a widening of spreads for riskier issuers.

How Did Markets Respond?

Financial markets reacted swiftly to Trump's threats. Capital One, JPMorgan, and American Express saw some of their sharpest declines in months as investors priced in the potential impact of a rate cap. The ripple effects extended beyond banks, with airline and retail stocks also falling. This comes at a time when banks are already navigating a difficult earnings season, with profitability concerns mounting.

At the same time, foreign demand for U.S. Treasuries has rebounded, reaching a record high of $9.355 trillion in November. This reflects renewed confidence in U.S. assets, despite political uncertainty. Japan, the United Kingdom, and Canada led the inflows, while China reduced its exposure. The 10-year Treasury yield fell to 4.019% by the end of November, signaling strong appetite for safe-haven assets.

What Are Analysts Watching Next?

Analysts are closely monitoring the potential impact of Trump's proposed credit card reforms. While many doubt the likelihood of a 10% rate cap, the mere possibility has caused significant market volatility. If enacted, it could force credit card companies to seek alternative sources of revenue and could push consumers toward less regulated lending options.

At the same time, the Fed is being closely watched. Federal Reserve Bank of New York President John Williams has signaled that monetary policy is now well positioned to support the economy and bring inflation back to target. However, with political pressure mounting, there are concerns about the Fed's ability to operate independently.

Investors are also keeping a close eye on the AI-driven credit boom. While strong demand for AI infrastructure is driving issuance, some are warning against complacency. With low risk premiums and high supply, the market is exposed to a potential correction if economic conditions weaken. For now, though, optimism remains strong.

In summary, global credit markets are experiencing a rare confluence of low yields, high issuance, and political uncertainty. While demand for credit remains robust, the risks of policy shifts and regulatory changes are growing. Investors will be watching closely for signs of either a sustained rally or an unexpected downturn.

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