Current yields and total return prospects are presenting an attractive case for IG credit—but a global and flexible approach is key to capturing the diverse range of potential opportunities to generate alpha.
How supportive is the backdrop for IG credit today, and why do you believe now is a good time for investors to consider the asset class?
Natalia Krol: The current macro environment is favorable for investment grade (IG) credit, with expectations for lower policy rates in the U.S. and Europe. Although credit spreads are tight, prompting some investors to question the timing of investing in this asset class, high all-in yields and attractive total return potential make a compelling case for IG credit. Yields on U.S. IG corporate credit are near their highest point in 15 years, which has driven strong demand for the asset class (Figure 1).
Figure 1: IG Yields Remain Near Record-Highs
Sources: Bloomberg; Barings. As of October 31, 2024.
Similarly, in Europe, corporate fundamentals are stable, and flows into IG funds are a positive technical. The recovery from the energy crisis and the European Central Bank’s rate cuts in response to falling inflation are positive catalysts for European IG spreads. Most importantly, despite tight average spreads, the high dispersion in the market—with many segments trading wider than average—is presenting ample opportunities.
Moreover, history shows that the total return potential for the asset class is attractive following the end of central bank rate-hiking cycles and ahead of rate cuts. Historically, during these periods, the average total return for the asset class was 9%, 15% and 11% in the following six months, one year and three years (annualized), respectively.1
1. Source: As of October 31, 2024.
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