Capital IdeasTM
Investment insights from Capital Group
Fixed Income
Karen Choi
Scott Sykes
Flavio Carpenzano
An uncertain economic outlook and high interest rates are generally not viewed as a positive backdrop for investment-grade (IG) corporate bonds (rated BBB/Baa and above). Yet, a confluence of supportive factors is underpinning this asset class. These include relatively good credit quality, high average starting yields above 5.5%, an overall duration of about seven years and stabilisation of the banking sector.
As a result, credit spreads above US Treasuries have tightened to slightly less than 120 basis points (bps), which is near their 10-year average of 124 basis points.
In our view, while investment-grade credit could come under selling pressure in an extreme risk-off environment - the duration profile of the sector, credit fundamentals that are better than in prior periods of economic stress, as well as sustained demand from investors - should provide a degree of support, limiting downside risk in most scenarios.
Overall, we believe investment grade provides a solid middle ground for portfolios. If the US Federal Reserve (Fed) executes a ”soft landing“ and avoids a recession, investment-grade credit should fare well. And if there’s a ”hard landing“, the drawdown in investment grade should be muted compared to what we would expect to see in equities.
This article discuses why investment-grade credit can provide a compelling long-term investment opportunity.
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Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.