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

Inflation and supply chain disruption: Impact on corporate sectors
Inflation and supply chain disruptions, along with the moderating pace of the post-pandemic earnings recovery, have made us more cautious on corporate fundamentals as we enter Q3 reporting season
Japanese employment: engaging for greater equality – an update
A year has passed since we published a note exploring the long-standing issues around the under-representation of women within the Japanese labour force.
SDG Engagement High Yield Credit commentary: Intesa Sanpaolo
As Italy’s leading financial institution, the Intesa San Paolo Group (Intesa San Paolo) serves 13.5 million Italian customers through its 4,300 branches.
Lessons from the EU: Development of the UK’s green taxonomy
The UK is in a strong position to leverage the significant effort that has gone into creating the EU Taxonomy, whilst adapting the framework to suit the UK market where necessary
Global Equity ESG Fund: H1 Report, 2021
We continue to focus on the transition to a more sustainable economy, which we view as an exceptional market opportunity as awareness grows of sustainability issues and opportunities.
Direct lending: how senior is your debt?
Private credit is broadly described as non-bank lending where the debt is not issued or traded on public markets.