I’m often asked by clients where we see value in global investment grade (IG) credit spreads. This isn’t usually a straightforward answer, as so much depends on context. Nevertheless, valuation dynamics and varying investor appetites are key to our view that demand for IG credit assets will remain strong, and we have built a constructive position in our Global Corporate Bond strategy accordingly. 

Assessing OAS valuations

Before we get into how we’re expressing our constructive view in portfolios, let’s take stock of where credit spreads are today. While spreads – as measured by option-adjusted spreads (OAS) – are at the lower end of their historical range, comparing spreads over time requires investors to account for compositional differences in the asset class. Looking back at US IG credit spreads, July 2005 was the last time the IG Corporate Index OAS was around 79 basis points.

An index level of 79bps OAS certainly feels at the tighter end of the range, but if we adjust for quality, duration and price differences in index composition, the current spread level is approximately 17bps wider than the late 1990s, and in line with levels seen in 2018 and 2020. With this historical context, we are not (yet) at the all-time tights in IG spreads. 

IG curves are also flatter today than they have been during periods of tight spreads. For example, when comparing today’s curves to the steeper curves on offer in 2005 – when index OAS spreads were at a similar 79bps level – the long end today is particularly rich, with limited supply and strong investor demand. For this reason, we favour exposures in the intermediate part of the curve, where we are finding attractive carry, and where history suggests there is still some upside to spreads. 

Valuations on a yield basis

For investors that are more yield focused or analyse the market on an asset swap basis, there is still compelling relative value on offer versus history. With the yield for US IG credit in the 63rd percentile over the 20-year period since 2005, yields are more attractive than they have been for most of the last two decades.

For Japanese or European investors, regions that are typically large foreign buyers of US IG credit, this yield environment is important. The EUR-hedged yield is 2.94% and the JPY-hedged yield is 1.43%, for US IG credit, both of which are attractive compared to local alternatives and historical averages.

Even with tight spreads, a 25bps decline would still leave yields (currency hedged or outright) some way from their most expensive levels historically, suggesting there is room for spreads to move tighter, especially if technicals remain favourable.  

Against this tight spread backdrop, we favour an overweight credit portfolio in our global corporate bond strategy via baskets of our analysts’ best ideas within US and EUR IG. We prefer an overweight to hybrid capital (industrial hybrids, preferred securities & AT1 [focusing on high reset structures]) for additional attractive risk-adjusted carry. Thematically we tilt into sectors with net tailwinds going into 2026.

Asset swap investors

Looking at valuations from an asset swap perspective is also helpful, given the amount of institutional demand (pension funds, insurance, corporate treasuries and sovereign wealth funds) that is aligned with this metric.

The asset swap spread (ASW) measures the difference between the yield of a bond and the corresponding swap rate, effectively isolating the credit risk premium after accounting for interest rate risk. In environments where government yields are volatile or swap spreads are moving independently, ASW can provide a more stable and attractive measure of credit value.

Currently at an ASW of 114bps, US IG is meaningfully wider than 79bps on an OAS basis, reflecting additional compensation for swap market dynamics and technical factors. Indeed, part of the reason for the long end of the curves being so rich on an OAS basis, is due to these investors looking at yields and bonds on an ASW basis, where those valuation metrics are still compelling from a historical standpoint.

What do we like in IG credit markets?

Overall, we are of the view that there continues to be a solid foundation within IG credit. The impact of tariffs on companies globally is expected to be manageable and, for the US at least, most sectors will benefit from an expanded tax shield via the One Big Beautiful Bill Act (OBBA).

Our fundamental research suggests that 80% of corporate sectors have a neutral or positive impact from the combination of tariffs and expected OBBA benefits, and many companies have actually been able to increase their free cash flow guidance for 2H2025/2026 because of this net tailwind. In Europe, we are seeing a similar story with tariffs playing out.

In our global corporate bond strategy, we maintain our overweight to the banking sector, where we see strong profitability and stable credit metrics. From a valuation perspective, we believe there is room for continued outperformance versus the overall index, despite fundamental and technical measures trending above historical averages.

We remain cautious on consumer staple and food & beverage, where we feel spreads do not fully compensate for sector risks, and will continue to monitor demand trends and pricing power. The energy sector is likely to benefit from ongoing structural trends, while capital goods and autos present selective opportunities as fundamentals improve.

In Europe, our positioning reflects the direct and second order impacts of German infrastructure and EU defence spending, which are providing the broadest tailwinds for cyclical sectors. Capital goods stands out as a beneficiary of secular trends (such as automation) as well as having exposure to US tech and data centre growth.

Risks to our view on IG credit

There are of course potential banana skins along the road that could cause a deviation from our view. When analysing the buyer base for US credit since 2021, we find that flows are most correlated to yield and return. With the market now pricing additional rate cuts by the US Federal Reserve towards a 3.5% level over the next 12 months, our analysis suggests that a fall in yields would initially drive flows higher, with a decline of 100bps estimated to raise demand by 15%. However, lower yields would mean lower demand in the long run – we estimate a reduction of approximately 30% in demand for every 100bps in yield.

Our overall base case of sub-trend growth is generally supportive of credit spreads and corporate fundamentals, but we are keeping a key eye out for any shifts in this demand dynamic as changes in the yield environment could provide a potential catalyst for spread widening.

Our IG credit positioning reflects a broadly constructive backdrop

While spreads are tight, the balance of strong technicals, solid fundamentals, and supportive fiscal and legislative tailwinds suggest there is modest potential for further tightening. At the same time, the outright yield on US IG credit, at 4.78%, is above the long-term average and remains attractive for global investors, especially when currency-hedged. Higher yields provide a cushion against potential spread widening or price volatility, supporting positive total returns even in a more uncertain macro environment.

While the backdrop for IG credit looks constructive, it’s important to remain vigilant to macro, policy, and sector-specific risks. In this uncertain environment, our focus is on selectivity and sector positioning to capture incremental value.