The New York Knicks are back in the NBA Finals for the first time since 1999, and some investors are wondering whether markets have taken the same trip down memory lane. The dominant story is once again technology, capital spending and a willingness to pay up for future growth. The S&P 500 sits at all-time highs despite the geopolitical noise, while investment-grade credit spreads are close to their post-Global Financial Crisis tights — even as AI-related financing needs surge.
The comparison is tempting. The late 1990s were also defined by the belief that a new technology would lift productivity and justify higher valuations. But for bond investors, the parallel only goes so far — and the differences matter more than the similarities.
The cycle looks more like 1997 than 1999
AI has become the market's central narrative. Equity leadership is narrow but powerful, capex plans are accelerating, and credit markets are increasingly being asked to finance the infrastructure behind the boom: data centres, semiconductors, power generation and transmission.
What's missing — for now — is the broad-based balance sheet excess that defined the late-1990s peak. Growth is resilient, earnings are holding up, and corporate balance sheets are not broadly overextended. The most aggressive financing activity remains concentrated in AI-related infrastructure and selective M&A rather than across the entire corporate market.
That puts the cycle closer to 1997/98 than 1999/2000. The early phase of a capex cycle is typically healthy for growth, equities and even credit fundamentals. The later phase is where the risks build: over-issuance, rising leverage, weaker underwriting standards, and spreads that no longer compensate investors for what can go wrong.
The job for now is to watch for the transition.
Treasuries snapped back as oil eased
Treasuries rallied as oil prices fell on hopes of a resolution to the US-Iran conflict. Oil has become the market's macro fulcrum: lower crude prices helped Treasuries rally, eased inflation fears and improved risk appetite. A credible deal that reopens the Strait of Hormuz would reduce the risk of an energy-led growth shock.
The harder question is whether this is the start of a better fixed income regime or simply a relief snapback.
The constructive case is straightforward. Entry yields are high, demand for income is strong, and upside inflation momentum may be stabilising. If oil continues to fall and labour markets cool gradually — allowing the Federal Reserve to stay on hold rather than hike — fixed income's forward return profile improves materially.
The counter-case is equally credible. The Fed has not turned dovish, inflation is still elevated, and long-end yields face fiscal, term premium and global-rate headwinds. A reopening of the Strait of Hormuz would reduce a tail risk, but it isn't the same as disinflation. Inventories still need to be rebuilt, supply chains repaired, and the market may continue to price a geopolitical risk premium if the underlying political settlement looks fragile. Summer driving demand, refinery dynamics and the pace of physical inventory rebuilding could all keep energy prices stickier than a headline resolution suggests.
"Starting yields are fundamental to prospective returns, and today's higher yield levels suggest better forward return potential. The current environment remains constructive for fixed income investors, even if the path is likely to remain choppy." - Schroders US Multi-Sector Fixed Income Team
Credit is benign — but the cushion is thinner
The credit story remains supportive on the surface. Earnings are resilient, defaults are contained, and high all-in yields continue to attract buyers. Even with the increased funding needs tied to the AI buildout, corporate issuance has been well absorbed, and the market's appetite for income is strong.
The nuance is in the composition of returns. Credit spreads are tight, and an increasingly smaller share of all-in yield now comes from spread compensation. Investors are still being paid to own credit — but more of that payment is coming from underlying Treasury yields rather than from being compensated for credit risk.
This is not a market that is broken. It is a market where the easy beta trade is less compelling, the cushion is thinner, and the margin for error is smaller. Credit can remain tight for some time, but stretching for generic corporate exposure here offers a poor risk-reward.
Where the opportunities sit
The implication is to be selective about where carry is earned. Rather than chasing broad corporate spread compression, the Schroders team sees better risk-adjusted opportunities in:
- Securitised assets - where valuations are less stretched and structural protections remain attractive.
- Select EM debt - where idiosyncratic stories offer better value than the broad corporate market.
- Municipal debt - where after-tax yields and credit fundamentals remain compelling.
- Idiosyncratic credit stories - single-name opportunities where issuer-specific dynamics matter more than market-wide spread direction.
The broader message is one of discrimination. Fixed income's setup remains constructive - high starting yields, contained defaults, resilient earnings — but the easy trades are behind us. From here, returns will come from where investors choose to take risk, not from how much.
The Knicks may be back in the Finals, but markets aren't back to 1999. The challenge is making sure they don't get there in 2027.