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

No time like now: why investors are moving on ESG
We take a trip down memory lane and into the future with ESG...
Can palm oil ever be considered sustainable?
With monocropping one of the main causes of deforestation, palm oil production needs to change. Rather than staging a boycott, responsible investors should engage with companies across the supply chain to encourage the adoption of globally recognised certification standards
Leading the way in climate-related engagement: Federated Hermes achieves A+ score in InfluenceMap study
Federated Hermes ranks among the top five firms in a study focusing on the climate-related engagement efforts of the world’s 30 largest asset management groups.
Weekly Credit Insight
A Lift-off in rates focuses attention on security selection and an unconstrained approach
A changing climate in fixed income: 360°, Q1 2021
In a sustainability-focused edition of 360°, we explore how sustainable finance shifted from a niche corner of the market to a position of prominence.
Credit Pulse: market update - 12 February 2021
What are our views on fixed income markets for the next coming months? How does the team prepare for the different possible outcomes?