Investment Grade
Investment grade credit – the sweet spot in fixed income?
5 min read 15 Feb 23
For more information on the financial terms used in this article, please consult the glossary.
At this stage of the economic cycle, we think investment grade corporate bonds look especially well placed, offering an attractive real yield combined with resilience and diversification qualities to help withstand a more challenging market backdrop.
Natural diversification elements of corporate bonds – rate and spread components provide separate drivers
Past performance is not a guide to future performance
While the global economic outlook remains subdued, we believe that corporate bond markets are pricing in an awful lot of the bad news. Investment grade credit spreads are reflecting an implied default rate well in excess, not only of average default rates, but also of the worst default rate experience. We think this reflects an excessively gloomy outlook for default rates, and we believe investors are being well paid to take credit risk.
One of the most attractive features of corporate bonds is that they provide exposure to both the risk-free rate (government bond yields) and a risk premium (the spread between the yield of government bonds and corporate bonds). These two elements typically – though not always – move in opposite directions to each other, providing almost an in-built hedge against adverse market conditions.
By 2020, the risk-free rate had largely disappeared and, as a consequence, we were very cautiously positioned over that period. The good news is that the risk free rate is back today and this makes us much more positive on the asset class. In the event that the economic slowdown turns out to be more severe than anticipated, we would expect the risk-free rate to fall, and this should at least partly offset any weakness in credit markets.
The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. Past performance is not a guide to future performance. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast.
The content of this page reflects M&G’s present opinions reflecting current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. All information included in this page has been written for informational and educational purposes only and does not constitute an offer or solicitation to invest into any security, strategy or investment product. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents.