Capital Ideas^TM

The turn in the interest rate cycle toward lower rates potentially provides a strong backdrop for fixed income. And with its high quality, attractive yield and duration profile, we believe investment grade credit could be well positioned to provide investors with strong returns over the coming investment cycle.

Yields are significantly higher than their historical averages and so offer investors the chance to lock in attractive levels of relatively secure income over the long term. Meanwhile, corporate fundamentals look solid and the macroeconomic backdrop could provide a duration tailwind to the asset class as central banks ease policy.

History shows us that purely focusing on duration, however, and investing in government bonds to capture this return is unlikely to provide optimal results. Over the past 20 years, investment grade corporate bonds have consistently delivered superior results relative to government debt except in periods of severe market stress – an outcome we view as unlikely. We believe this dynamic will hold in this cutting cycle and that, therefore, global corporate bonds could provide the better solution for investors.

These arguments are well known and have helped the investment grade market absorb record levels of issuance year-to-date. The pushback we often hear from clients is that while all the above is true, spreads are well within historical averages, and so with all the good news already priced in, the asset class is simply too expensive.

In this paper, we take a closer look at investment grade corporates and explain why we do not think spreads are as tight as they seem, why investment grade credit still looks an attractive area of the fixed income market to capture the opportunity from Federal Reserve policy easing, and why the technical backdrop could remain supportive.