We continue to find attractive opportunities in global investment grade (IG) credit. While spreads remain at the tighter end of their historical range, the market is supported by compelling starting yields and a resilient demand backdrop. Recent geopolitical developments, including the invasion of Iran, have introduced new uncertainties and volatility, but also reinforced the value of rigorous credit analysis, active security selection, and thoughtful capital structure positioning. These tools are essential for navigating a dynamic environment and capturing opportunities as they arise.
Resilient growth, evolving inflation, and adaptive policy
The macro backdrop for credit remains constructive, though it is now shaped by heightened geopolitical risks and shifting global dynamics. Growth in major economies has proven resilient, but the outlook is more nuanced given the potential for supply chain disruptions and energy price volatility stemming from recent events. Inflation pressures may fluctuate, particularly as commodity prices respond to geopolitical tensions, but central banks in developed markets are expected to remain measured and responsive. In the US, the Federal Reserve is likely to maintain a cautious approach, adjusting policy as needed to balance growth and inflation risks.
For IG credit investors, this environment underscores the importance of carry, diversification, and active management. While the risk of policy surprise has increased, disciplined credit selection and risk management can help investors take advantage of opportunities and mitigate challenges in a rapidly changing market.
Yield is driving demand
Headline IG spreads have remained resilient, and now stand at around 80-90 basis points (bps) in both US and European markets. It’s important to remember that spreads are a relative measure, expressing corporate risk compared to sovereign risk. Since Covid, corporate and household leverage have trended down, while government debt has risen. With corporate balance sheets improving relative to sovereigns, and corporate earnings and revenue continuing to accelerate, spreads appear resilient at lower levels.
Historically, spreads widen as earnings fall and tighten as earnings rise. Consensus expectations are for broad‑based, double‑digit earnings-per-share growth across the US, Europe, the UK, emerging markets and China in 2026. With margins still elevated, we’d expect corporate health to remain robust through 2026 even if earnings growth falters.
Meanwhile, yields remain attractive in relative terms. Higher starting yields raise the potential for higher total returns and are the primary driver of demand across the biggest buyer cohorts of IG credit: life insurers, retail funds and overseas investors. With the US IG corporate index yielding over 5%, the income proposition remains attractive.
What most IG investors are seeking is yield, and that remains in short supply. As a result, it is no surprise that due to both positive total returns over the last year and relatively attractive yields, the current demand backdrop for credit is running at elevated levels.
Capex and supply is rising but so is credit quality
While demand is strong, so is supply. The catalyst for new issuance is rising capex, particularly from US technology companies investing in artificial intelligence (AI) and data infrastructure. While we expect demand to comfortably meet supply, this is an area we are monitoring closely for the emergence of risks. AI hyperscalers dominated issuance last year, and we expect another bumper year for supply in 2026, with most sectors, not just tech, set to increase capex.
We are focusing on capex intensity (spend relative to cash flow and earnings power). Our base case anticipates approximately USD 300 billion of hyperscaler issuance over the next two years—above current market expectations—which could take the tech cohort to around 7% of the IG market. Even so, these are high quality issuers like Microsoft and Meta, with strong revenues and earnings, and low net leverage. Most IG tech issuers have debt to earnings ratios comfortably below 1x. These are mature companies optimising their balance sheets to invest for future growth, and investors should be happy to continue to absorb upcoming issuance.
One area of closer scrutiny is Oracle, where capex intensity is higher and outcomes are more closely tied to external platform success. However, even here, our analysts currently see the risk as manageable by the company, even under less favourable scenarios.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
Active toolkit: Utilise security selection, curve roll down and the IG capital structure
Across all sectors, credit health has been improving and the overall credit quality of the IG index has risen meaningfully. Upgrades continue to outpace downgrades in the US and Europe, and the share of BBB‑ securities (the lowest IG rating) in benchmarks is the lowest in over a decade following several years of upgrades. Today’s market is among the highest‑quality IG universes we have seen.
Thanks to the dedicated IG credit analyst team that we have at our disposal, in our IG credit portfolios we’ve been able to benefit from many of the key credit upgrades, with active overweight positions in T-Mobile, Broadcom and Uber among others contributing to performance.
Our corporate credit clock shows where different sectors are in the business cycle by plotting earnings growth against net leverage. As a credit manager, I want to see positive earnings growth and falling leverage, which is represented by the bottom right quadrant of the clock, which we are calling mid-cycle. This is the sweet spot for corporate health, and at the moment most sectors are in this category. We emphasise high quality mid-cycle issuers with resilient cash flows and disciplined capex plans.
As active IG credit investors, we can also use roll down to generate excess returns. After years of flat or inverted curves, the re steepening of IG curves means roll down is again an attractive source of excess return. For example, a seven year bond yielding ~4.6% today can deliver an implied one year holding period return of ~5.2% due to roll down, assuming unchanged market conditions—a meaningful uplift. Active managers can benefit from this additional carry by rotating along the curve, whereas passive investors are limited to holding bonds to maturity.
Finally, current markets can provide access to high yield like spreads within the IG universe to active investors with the ability to move down the capital structure. While broad IG indices trade near ~90 basis points (bps), IG non financial hybrids are around ~180 bps and Additional Tier 1 (AT1) bank instruments exceed ~300 bps. Selectivity based on thorough research is paramount, but the incremental carry from high quality IG issuers is attractive in today’s yield hungry market.