October 14, 2025
Dear Investors and Friends,
In August we wrote about the illusion that sometimes what looks like rising wealth is simply a weakening currency. When money itself loses purchasing power, prices for nearly everything, including stocks, homes, and commodities, tend to rise together. Investors feel wealthier, even if their real purchasing power is unchanged.
This month, we apply the same lens to credit markets. The prevailing view is that corporate bonds are fully valued. Spreads are tight, defaults are low, and many believe there is little room for further appreciation. That story is partly true but perhaps incomplete. What if corporate bonds do not look expensive because credit has improved, but because the risk-free benchmark against which they are measured has deteriorated?
The Benchmark Is Moving
For decades, United States Treasuries have been the global reference point for safety, a foundation upon which the pricing of virtually every other financial asset rests. But the fiscal position of the United States has changed meaningfully in recent years. Persistent deficits, repeated debt-ceiling battles, and the use of monetary policy to absorb government borrowing have all raised subtle but important questions about the risk profile of Treasuries themselves.
At the same time, high-quality corporations with strong balance sheets, global revenue bases, and stable governance have continued to improve their credit profiles. When that happens, the spread between Treasuries and corporate bonds can compress not because credit has become frothy, but because the sovereign reference point is shifting.
Spreads That Reflect Two Stories
It is tempting to interpret historically tight spreads as a sign of complacency or overvaluation. Yet spreads measure relative risk, not absolute value. If investors are demanding more yield from the United States government due to political uncertainty or fiscal stress, then corporate spreads will naturally look smaller. What is really happening is not that corporate debt has become dramatically safer or overvalued, but that the comparison point, the risk-free rate, has grown a little riskier.
That subtle shift may explain why some large institutional investors are increasingly using interest-rate swaps, rather than Treasuries, as their valuation benchmark. Swaps remove much of the idiosyncratic noise from Treasury supply and politics, providing a cleaner gauge of credit risk. Whether or not that trend continues, it highlights a deeper truth: when the measuring stick moves, the readings change.
Chart 1: Investment-Grade Corporate Spreads, 2015–2025
Investment-grade credit spreads remain near decade-long lows, reinforcing the perception that corporate bonds are fully valued. Spreads measure relative risk, and when the “risk-free” benchmark itself grows riskier, the comparison can be deceptive.
Source: Bloomberg.
The Broader Lesson
Investors have long relied on historical norms such as average spreads, average multiples, and average yields as guides to value. But those norms assume the foundation is stable. In the same way that inflation can make nominal asset prices appear to rise, structural shifts in sovereign credit can make other markets appear unusually tight or expensive. Both are illusions of measurement.
The key question is not whether spreads are tight, but why they are tight. If the explanation lies partly in a shifting benchmark, then what looks like exuberance may in fact be realism about relative safety.
What to Watch as the Debt Ceiling Returns
The next debate over raising the federal debt ceiling may not arrive for another year or two, but investors would be wise to remember what happens when it does. When political brinkmanship delays funding legislation, the Treasury Department must manage cash balances more tightly. That can briefly distort bill supply, repo markets, and short-term yields.
In the 2011 and 2023 episodes, Treasury bills maturing near the projected “X-date” traded at meaningful discounts to bills maturing only weeks earlier, as investors demanded extra yield to compensate for even a remote chance of delayed payment. These moments are usually resolved quickly, but they reveal an important truth: Treasuries are backed by full faith and credit, yet they are not completely immune to politics or liquidity stress.
For investors holding Treasuries at such times, the risk is not default in the traditional sense, but disruption. Temporary market dislocations can create unrealized losses, settlement delays, and pricing volatility. They can also ripple into money-market funds and collateral markets that rely on Treasury securities as their foundation.
By contrast, high-grade corporate issuers with strong balance sheets, diversified revenue, and global operations can sometimes offer steadier footing through such uncertainty. Consider Johnson & Johnson, one of the few remaining AAA-rated companies. Its long-term debt totals roughly fifty billion dollars, supported by nearly one hundred billion dollars in annual revenue, about twenty billion dollars in annual free cash flow, and nineteen billion dollars in cash. Its debt maturity schedule is well distributed, with no more than three and a half billion dollars coming due in any single year. Combined with a decades-long record of conservative financial management, these characteristics create a profile of exceptional stability.
If you owned a Johnson & Johnson bond maturing in the same quarter as a Treasury note during a debt-ceiling impasse, you might find that the corporate bond continues to trade normally while the Treasury issue experiences short-term distortion.
The point is not that Treasuries are unsafe. They remain among the most liquid and dependable securities in the world. The point is that “safe” and “risk-free” are no longer synonyms. Understanding the nuances of each helps investors prepare rather than react.
Conclusion: RCM’s Discipline
At Roosevelt Capital Management, we focus less on market averages and more on underlying fundamentals. We buy individual bonds from issuers whose cash flows, balance sheets, and management strength justify their yields. We diversify across maturities to balance reinvestment and duration risk. We keep liquidity high so we can act when opportunities emerge.
Our goal is not to predict when spreads will widen or narrow, but to understand what the spreads are really telling us. Maybe this time is different, but if the benchmark is what is changing, then the principles of credit analysis matter more than ever.
Steady stewardship, careful measurement, and an insistence on real value remain the core of how we navigate every cycle.
With gratitude,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.