There is a particular milestone the dollar sovereign, supranational and agency (SSA) bond market has been chasing this spring, and participants are barely hiding their excitement about it. Spreads have ground so tight that breaking through US Treasuries is now, according to more than one syndicate desk, something genuinely on the table.
The limit is no longer theoretical: deals are being priced with a 2bp handle, a whisker from the benchmark itself. It would take only a little more: a two- or three-year issue priced at near 1bp, swap spreads moving the issuer's way, and a bond could come through Treasuries outright.
It is tempting to read all this as a story about SSA strength. But it is at least as much a story about US weakness. A world-class supranational or top-tier agency pricing near or through the world's benchmark is not simply a reward for credit quality. It is a verdict on the benchmark.
With a new Federal Reserve chair in Kevin Warsh and a market pricing interest rises rather than cuts, fiscal arithmetic that refuses to improve, and a geopolitical backdrop that flares with every headline out of the Middle East, the "risk-free" rate is doing a convincing impression of something rather less than that description.
The same investors who once treated Treasuries as the unquestioned anchor of a dollar portfolio are now content to pay up for a triple-A name that offers spread, scarcity and none of the US's political theatre — and to give up some liquidity for the privilege.
That is a quiet but profound shift: SSA paper is no longer merely a pick-up to govvies, but in some accounts a substitute for them. Flattering for issuers, certainly, but it should also give the US sovereign pause.
Issuers are right to take what the market offers; that is issuers' and investors' job. But a little caution is no bad thing. With spreads this tight, the borrowers trading closest to Treasuries have the least room to give should the mood change — and the most riding on the goodwill they have built with investors.
Enjoy the records. Just don't mistake a shrinking benchmark for a bulletproof one.