Search this website. You can use fund codes to locate specific funds

Weekly credit insight

Chart of the week: global investment-grade returns rival those of high yield

There has been an unprecedented rise in the value of negative-yielding assets this year. The share of global assets that are negative yielding rose to an all-time high of 29% in August and now stands at just above 20% – still a hefty proportion of the fixed-income universe.

In this turn, this means that 2019 has become the first year in the modern history of credit markets where global investment-grade returns match those of high yield. Figure 1 shows how 2019 is the only year of double-digit returns where global investment-grade and high-yield markets have performed in line.

Figure 1: Investment grade returns on par with high yield

Source: Herme Credit, ICE bond indices, as at December 2019.

The difficult macroeconomic environment, a pick-up in defaults and low sovereign yields have prompted asset allocators to look to corporate credit this year, as investors that target high returns now need to choose which type of extra risk they are willing to take on. Initially, some managers extended duration and moved into lower-quality sovereign instrument. The next logical step was then to increase allocation to corporate credit – starting with investment grade.

Other options included taking on more foreign-exchange risk – by moving into higher-yielding currencies unhedged – or seeking a greater illiquidity premium in other asset classes. But this would likely have been a larger deviation from existing mandates then moving into corporate credit.

Looking into 2020, demand for credit should remain solid. Yet to deliver strong returns going forward, investors will need to take an unconstrained approach and focus on high-active share investing. At Hermes, we believe that flexible strategies are able to generate returns by allocating capital and risk across the entire credit spectrum and throughout the capital structure, something we discuss in more detail in our piece on flexible allocation.

More Insights

Launching new carbon-disclosure standards for UK finance
We played a key role in launching the UK coalition of the Partnership for Carbon Accounting Financials this week.
The Meeting Room Webcast: Impact Opportunities, September 2020
Listen to the latest Federated Hermes Meeting Room: Virtual Portfolio Briefing on Impact Opportunities.
Japanese employment: engaging for greater equality
Women have long been underrepresented in the Japanese labour force.
Sharpe Thinking
As markets emerge from a heady summer, volatility has started to rear its head again
Weekly Credit Insight
Treasuries have stayed in a narrow range as equities and credit have rallied
Weekly credit insight: volatility starts to normalise
Volatility in investment-grade credit has returned to the average level seen over the last decade