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Traditionally, the US Treasury has been able to borrow with low interest rates, because US Treasury debt is viewed as ultra-safe and ultra-liquid. But the gap between the interest rate of US Treasury debt and corporate AAA-rated bonds has been diminishing. Indeed, Microsoft recently issued some long-term bonds that paid lower interest rates than Treasury debt–an almost unheard-of event.

Julian Kozlowski  and  Nicholas Sullivan of the Federal Reserve Bank of St. Louis, provide some evidence on the overall pattern in “Are U.S. Treasuries Still `Convenient’”? (“On the Economy Blog,” October 14, 2025). Here’s a figure showing the interest rate gap between the highest-AAA-rated corporate bonds and U.S. Treasury bonds. As the authors write: “The AAA-UST spread has been declining, reaching 30 basis points on Oct. 8, 2025. Notably, the average spread from 2012 to 2019 was 67 basis points, whereas in 2025, the average contracted by nearly half, to 36 basis points. This narrowing of the spread is significant, as AAA-rated corporate bonds have historically offered less liquidity and safety compared with Treasury bonds.”
 

As this interest rate gap has shrunk, a few corporate AAA bonds are even beginning to pay lower interest rates than US Treasury debt–even though companies are (pretty much by definition) more risky than the US government and the market for corporate bonds is less liquid than the market for Treasury debt. For exampl,e, James Mackintosh recently wrote in the Wall Street Journal (September 28, 2025), about “Why Microsoft Has Lower Borrowing Costs Than the U.S.” subtitled “There are several theories for why anyone would pay more for a bond from Microsoft or Johnson & Johnson than for a Treasury.

So what’s going on here? Part of the answer, unsurprisingly, seems to be a matter of supply and demand. Back in 2007, before the Great Recession of 2008-09, total federal debt held by the public was about $5 trillion. Now, after the extraordinarily large budget deficits of the Great Recession and the pandemic recession, total federal debt held by the public has more than quintupled to about $29 trillion. The supply of Treasury debt is very high, so the government doesn’t get quite as low an interest rate when it sells additional debt.

Conversely, many investors have been making a push to buy more corporate debt. In many cases, they purchase this corporate debt through an index fund that combines AAA bonds from many companies. Given that there is much less corporate debt outstanding compared to Treasury debt, the demand for this highest quality corporate debt is up–thus bidding down the interest rate that such borrowers need to pay. In addition, Mackintosh points out that holding certain kinds of corporate debt can be useful in the market for interest rate swaps–which offer a way of hedging against higher interest rates.

But with all the reasonable explanations for why the gap between between US Treasury debt and AAA-rated corporate debt has diminished–or even turned negative–I have a small nagging fear in the back of my head: Is this a warning signal that investors around the world are mulling over the possibility that US Treasury debt–in a situation of booming US borrowing–is not as safe or attractive an asset as they had previously assumed?

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