(Bloomberg) -- If history is any guide, investment-grade US corporate bonds can stay at current nosebleed valuations for months more. 

That’s the conclusion of Barclays, which said that the present macro environment, and companies’ overall financial health, are similar to the period from 2004 through 2006, when the economy was growing at an annualized clip of over 3% and the Federal Reserve was hiking rates, ultimately stopping at 5.25%. 

The average investment-grade US corporate bond spread was around 91 basis points over those three years, close to Friday’s 89 basis points. 

“As long as the growth and rates story remains similar to that in 2004-06, we think the backdrop has the potential to keep spreads tight for some time,” strategists including Dominique Toublan wrote in a note on Friday, adding that current valuations are relatively high and there are risks in the market. 

US gross domestic product grew an annualized 3.4% in the fourth quarter in the latest reading, similar to the average of 2004 through 2006. 

The macro backdrop is just one of a series of reasons for corporate bond spreads to stay tight, the Barclays strategists wrote. Corporate balance sheets are generally strong, and earnings have been solid, while investors are seeking to lock in relatively high yields for retirees through annuities and pensions. 

“We could stay pretty tight for quite a long time,” said Travis King, Voya’s head of US investment-grade corporates. “From a fundamental perspective, earnings have been pretty supportive so you’re not seeing fundamental credit deterioration that would lead to wider spreads.”

Heavy demand has spurred companies to issue bonds while they can, lifting total high-grade corporate bond issuance this year to more than $550 billion, up more than a third from this time last year. First quarter bond sales reached a record.

“The backdrop for credit is good because we have more or less a soft landing and you’ve got central banks around the world that have already pivoted more dovishly,” Loomis Sayles portfolio manager Matt Eagan said. 

But there are still risks. 

A jobs report on Friday showed that US payrolls rose by the most in nearly a year and the unemployment rate dropped, easing pressure on the Federal Reserve to cut rates. Dallas Fed President Lorie Logan said soon after the report that it’s too soon to consider cutting interest rates, citing recent high inflation readings and signs that borrowing costs may not be holding back the economy as much as previously thought. 

That growing ambiguity about whether there’s any reason for the Fed to start cutting rates helped to lift a measure of interest rate uncertainty, the ICE BofA MOVE Index, by the most last week since 2023. Torsten Slok, chief economist at Apollo Global Management, thinks the Fed won’t cut at all this year, which could drive the MOVE index even higher.  

Because investment-grade corporate debt is so sensitive to rate movements, any increase in the MOVE index could translate to wider corporate bond spreads. The two measures have been fairly closely correlated since the Fed started hiking rates about two years ago. 

Other factors could also weigh on corporate debt. Wars in Ukraine and the Gaza strip may intensify or expand, while the US presidential election could weigh on economic expectations. And with the Federal Reserve keeping rates relatively high to try to keep inflation in check, many companies will face higher interest costs.   

“Expectations for the macro backdrop could shift rather rapidly over the next couple of quarters,” said Daniel Sorid, Citi’s head of investment grade credit. He projects investment-grade spreads will widen later this year.

“We see a friction between the pivot in the way companies are managing their balance sheets and our expectations for a weaker US economy,” Sorid said. “Firms have begun to pivot away from more conservative pandemic-era balance sheet management practices that were very credit-friendly over the past couple of years.”

But even if valuations seem relatively high now, that doesn’t mean corporate bonds will weaken in the next few weeks. 

“There’s not a lot of room for additional tightening,” Pacific Investment Management Co. portfolio manager Sonali Pier said. “But I think it can persist longer than most predict due to the macro backdrop, demand for high quality credit and if issuers were to be patient on supply.”

(In story that ran on April 8, corrects possible source of interest-rate volatility in 12th paragraph)

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