Bond markets are at a turning point, according to a report today from Standard & Poor’s Ratings Services. Corporate bonds are pricey, and returns may be hard to come by.

“There is little debate that corporate bonds are generally expensive, and investors will be challenged in their attempt to match the returns posted in 2003 and 2004,” S&P says. It notes that “many of the factors that contributed to the bullishness” are now poised to weaken. Notably, global default rates are in a trough, it suggests, even though defaults are expected to remain low in historical terms.

The fact that default rates are still so low, and the gap between upgrades and downgrades is relatively narrow, means credit fundamentals look solid, it says. But, “among issuers, ‘cheap’ financing will be harder to obtain notwithstanding steady credit fundamentals, in response to an increase both in the underlying benchmarks and a gradual widening of bond spreads from their currently compressed levels,” it says.

“This implies that the borrowing cost for issuers will likely increase at a time when the corporate financing gap has moved into positive territory for the second consecutive quarter,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “Momentum in capital spending — most notably in the U.S., which continues to serve as the global locomotive — is expected to downshift from last year’s robust pace, though it appears to have strengthened after a weak first quarter.”

The near-term bond issuance pipeline in the U.S. is expected to advance in the low single digits this year, S&P predicts, “though the potentially hefty financing needs associated with leveraged buyouts could act as a significant wildcard both in the U.S. and Europe.”