The list of reasons not to own U.S. Treasuries is lengthening. In turn, investors are increasingly eschewing the world’s “safest” and most liquid asset and instead flocking to the debt of some top-tier U.S. companies
This isn’t a new phenomenon, but it is attracting renewed attention as sentiment towards Treasuries sours in the face of rising inflation, deteriorating public finances, and growing doubts that policymakers have the heart to tackle either.
The yield on the 2-year Treasury note has risen 60 basis points this year above 4.00 per cent, largely due to the spike in inflation from the Iran war-driven energy shock that is now expected to force the Federal Reserve to hike interest rates. The 10-year Treasury yield has also jumped 35 bps to more than 4.50 per cent.
Debt of many blue-chip U.S. companies has performed better this year, leaving some with yields near Uncle Sam’s.
Last week, the yield on Apple notes at the two-year point on the maturity curve fell to within 3 basis points of the two-year Treasury yield, the tightest spread on record. The yield on Microsoft debt at the two-year point of the curve ‘traded through’ the two-year sovereign yield earlier this year, as the yield on Johnson & Johnson debt sporadically did in 2021, 2022 and 2024.
It’s a slightly different picture further out the curve, where sovereign borrowing costs are lower than comparable yields on corporate bonds. But the direction of travel is similar.
Last week, the spread of J&J yields over 10-year Treasuries was the tightest on record at 27 bps, and Apple debt maturing in around 10 years yielded just 24 bps more than 10-year Treasuries, the narrowest spread since January 2025.
The explanation is clear: corporate America’s balance sheet increasingly looks better than Uncle Sam’s.
U.S. public sector finances took a serious hit after the Global Financial Crisis of 2007-09 and COVID-19 pandemic of 2020-21. Washington injected trillions of dollars of fiscal and monetary stimulus into the economy to avert almost certain depressions.
The federal debt is now around 100 per cent of GDP and rising, the budget deficit is around 6 per cent of GDP and not expected to narrow meaningfully over the next several years, and interest payments are on track to reach US$1-trillion a year soon.
The corporate sector, on the other hand, is in good shape. Tech titans like Apple and Microsoft, and other corporate giants like J&J and Berkshire Hathaway, have been racking up solid revenues and profits year after year, solidifying their already strong financial foundations.
True, their debt metrics may not remain pristine as the artificial intelligence buildout ramps up. The AI capex bill this year will be huge at US$800-billion, according to some estimates. That means cash balances are being whittled away and borrowing is surging. If that spend fails to generate the expected returns, these companies’ balance sheets will no longer be bulletproof.
But tech optimists are confident productivity will take a huge leap on the AI springboard, more than offsetting the borrowing fueling the biggest capex boom in history.
Credit ratings reflect this.
Microsoft and J&J are the only two U.S. companies to enjoy the top, triple-A credit rating from the three major credit rating agencies Standard & Poor’s, Moody’s and Fitch. Apple is still rated Aaa by Moody’s.
The United States government, on the other hand, no longer has a triple-A rating from any of the three agencies. Standard & Poor’s was the first to issue a one-notch downgrade in 2011, and Moody’s was the last to do so in May last year.
In short, if credit ratings are to be believed, lending to some highly rated borrowers is no less risky than lending to Uncle Sam. And if you can pick up a few basis points while doing so, the investment case starts to seem pretty solid.
“Cash-rich companies with high earnings growth are in a great position to thrive,” says Stephen Jen, founder of London-based hedge fund Eurizon SLJ Capital. “Why shouldn’t more corporate bonds trade through the sovereign yield curves?”
Of course, investors buy U.S. sovereign debt for reasons that go far beyond credit ratings. Treasuries are the deepest, most liquid financial market in the world, they are the benchmark asset against which global interest rates are set, they’re the global reserve asset, and they’re backed by the world’s number one economic and military superpower.
Nvidia, Microsoft, and other AI masters of the universe have a bit to go before they enjoy these “exorbitant privileges.”
However, some of the companies with the largest market caps, especially in the tech and AI space, may increasingly be considered “too big to fail” – especially as the global AI arms race heats up. If so, their debt may essentially be treated as quasi-sovereign, meaning their spreads could shrink even further.
Ultimately, this leaves investors with one fundamental, long-term question: who is more likely to pay me back - a company that may not exist in 10, 20, or 30 years’ time or the U.S. government?
In some cases, it’s now a coin-toss.