Capital IdeasTM

Investment insights from Capital Group

Can investment-grade credit provide resilience amid uncertainty
Karen Choi
Portfolio Manager
Scott Sykes
Portfolio Manager
Flavio Carpenzano
Investment Director

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.

Karen Choi is a fixed income portfolio manager at Capital Group. She has 24 years of investment industry experience and has been with Capital Group for 15 years She holds a bachelor’s degree in international relations from Wellesley College. She also holds the Chartered Financial Analyst® designation. Karen is based in New York.

Scott Sykes is a fixed income portfolio manager at Capital Group. He has 22 years of investment industry experience and has been with Capital Group for 17 years. He holds an MBA in finance from the Wharton School of the University of Pennsylvania, a master’s degree in international economics from the University of Essex, and a bachelor’s degree in both commerce and German from Washington and Lee University. Scott is based in New York.

Flavio Carpenzano is an investment director at Capital Group. He has 18 years of industry experience and has been with Capital Group for two years. He holds a master's degree in finance and economics from Università Bocconi. Flavio is based in London.