Remy: New York morning trade, we are looking at the 10-year US Treasury yield right around the 4.95% level, but the 10-year testing 5% in September and corporate debt issuance accelerating to fund massive AI infra as well as investment grade credit at a critical inflection point. Now despite hawkish monetary policy from the Federal Reserve and sticky inflation all around the globe, the credit spreads on blue chip borrowers from Alphabet and Amazon to Meta and Microsoft remain historically high. Now investors are balancing elevated all-in yields against sweeping government Treasury supply and margin pressures across corporate America. Well, joining us this morning to break down US investment grade debt, rates and credit spreads is Zach Griffiths, head of IG and macro strategy at CreditSights. Good morning, Zach. Thank you so much for joining us. Well, this month, the 10-year Treasury yield breached 5%, and this came as inflation worries as well as government supply collided. So you've warned that yields could head toward even 5.5%. So at what point does this rate sell-off start cracking high grade corporate credit?
Zach Griffiths: That's the key question, Remi, and so far I think earnings have been very robust and there's still a lot of optimism as it pertains to AI and the kind of growth and productivity it has still yet to unlock. And so we don't think a move to those levels necessarily crack US investment grade corporate spreads, but we are already seeing signs of bifurcation in the high yield market, so seeing signs of these higher borrowing costs becoming a problem or a concern for investors who have widened spreads at the riskiest part of the high yield spectrum.
Remi: Yeah, and expanding on that for our viewers out there, tell us what's actually happening when it comes to IG credit spreads, especially given borrowing costs as well as some of the geopolitical headwinds out there. And why are credit markets absorbing this volatility so well?
Zach Griffiths: That's another great question. Spreads are extremely stable. We've hung out around 80 basis points all year long, and you have seen a widening in spreads for the tech sector broadly as you have had such heavy debt issuance, but that's been offset by a rally in energy companies and basics to a certain extent as the higher energy costs for energy producers is actually a boon and so you're seeing a little bit of an offset there, but when you look at the market in aggregate, it's been extremely stable and I think part of that is resilient economic growth, extremely strong earnings in the US in both Q2 and Q1 and so that's really kept a lid on spreads and when you think about total return focused investors that just look at the all-in yield to worst on the investment grade index that has risen and become more attractive while at the same time economic growth and fundamentals have held up quite well so you haven't had to have material spread widening at an index level to earn more on your investment in the highest quality corporates and I think that's one of the several dynamics that have kept credit spreads relatively well behaved in what's been a fairly chaotic policy environment in both 2026 and 2025.
Remi: And while I have you here, Zach, I do want to get your perspective on what we're seeing when it comes to artificial intelligence, in particular some of the Mag 7 names out there, because we saw a Meta rally yesterday and we have been seeing a resurgence in Mag 7, but we do have to keep in mind that earlier this year the Mag 7 were referred to the LAG 7, and when we look at cash rich tech giants like Microsoft as well as Meta and Alphabet, they have been issuing billions in IG bonds to fund AI infrastructure. So how are bondholders weighing this massive AI capital spending surge against some of the balance sheet leverage as well as credit ratings?
Zach Griffiths: A lot of interesting dynamics there, Remi, and I think just a couple of months ago in July sentiment had soured pretty dramatically on the hyperscalers in particular in terms of how much debt they were issuing and the kinds of spreads they would need to offer to continue clearing all of this debt. I think some of that negativity has shifted to the background, but the story and the impact on the market of heavy issuance is here to stay. Estimate in terms of hyperscaler capex in 2026, it should come out to around 825 billion, likely to move above 1 trillion in 2027. So those issuance trends are unlikely to let up anytime soon, and these hyperscalers need to tap every currency, every kind of market they can going forward. And so I think interestingly the Alphabet deal back in August came with very elevated order books, so strong demand, but they did have to offer more in terms of new issue concessions, so more spreads relative to the existing debt outstanding. We think that that is probably the dynamic you're likely to see going forward. So demand for the debt, but at more attractive spread levels, that's kind of what we're anticipating seeing into 2027. That puts a little bit of upward pressure on spreads from even where we are today, at least in the USIG tech space.
Remi: Yes, and I do want to get your perspective on how monetary policy affects the space. Recently, Fed chair Kevin Warsh raised rates to a range of 3.75% to 4% in order to fight inflation here in the US, but when we look at Fed funds futures, more hikes are being priced in. So for our viewers, tell us what's happening when it comes to the refi squeeze for IG borrowers.
Zach Griffiths: So borrowing costs are rising, or at least front end rates are rising. We went up 25 basis points as you mentioned last week. The market's price for another 75 basis points of rate hikes through the July 2027 meeting, and it's interesting when you think about what really drives corporate borrowing costs. That's Treasury yields a little bit further out the curve. Call it the 10 year space that has a big impact on the mortgage market as well, and so right now the market is priced for fairly aggressive further tightening by the Fed, and from our perspective, the idea of them delivering even more in rate hikes than what is priced seems unlikely at this stage. So when thinking about all of the various factors at play that drive borrowing costs, Treasury and investment grade corporates, we don't see incremental pressure coming from a hawkish policy stance side perhaps more in terms of risk premium is what we need to worry about and the balance of supply and demand as we do have elevated fiscal deficits competing with all of that hyperscaler issuance that we mentioned earlier.
Remi: Yeah, and Zach, that leads me to my final question. So given everything you mentioned, where should credit investors actually position along the yield curve? Is it short duration, intermediates, or long bond issues?
Zach Griffiths: So we're more comfortable moving up in duration, so shorter into the maybe 1 to 3 year, 3 to 5 year bucket, as we do remain concerned that yields could rise even further, as you mentioned at the outset, to maybe 5.25% to 5.5% on the 10 year. And so to insulate your portfolio from the damage of higher rates, moving shorter in duration is the best way to position from our perspective, moving into the belly is OK as well. I think you get a little bit more carry there without the damaging duration risk that you'd take moving out to the long end of the curve. So we like being in the front end and belly until we get a better sense of where yields go from here.
Remi: Well, Zach, we will have to leave it there for today, but thank you so much for joining us and thank you so much for sharing all of your insights as well as your perspective.
Zach Griffiths: Thank you.
