Credit spreads and rising interest rates
Source: Barclays, Moody’s, Bloomberg. US IG OAS is Barclays US Corp Spread, US HY OAS is Barclays US HY Corp Spread. Data as of 17 April 2017.
Credit spreads have tightened substantially over the last year since their tights of 2014, leading many to comment that the asset class no longer represents good value. We believe current full valuations on higher-quality credit are justified by strong and resilient economic data, although investors will need to be increasingly vigilant about diversification, especially if dispersion increases from here.
For pension investors, this chart shows that in a rising-rate environment, credit spreads in both high-quality and high-yield credit have typically compressed. In this scenario, hedging interest rates with credit, rather than sovereign bonds, can offer a better trade-off between liability-relative risk and return. We explore this idea further in our lead article, The benefits of being “insurance-like”.