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

The geometry of net zero: an accounting conundrum waiting to happen
Emissions accounting is often inconsistent, inaccurate and imply that climate change can be reduced to a book-balancing process.
2020 TCFD report: our climate-related financial disclosures
This report details our approach to identifying and managing climate risks.
Your Questions Answered by Unconstrained Credit
A quarterly series featuring the top 10 questions that clients and prospective clients ask our investment teams.
Sustainable oceans in focus in EOS’s Q2 Public Engagement Report
EOS takes a deep dive into our oceans, examining threats from overfishing, pollution and global heating.
Dark matters in finance: why climate change is bending bank disclosure standards
Climate change is pushing the boundaries of financial risk disclosure into unknown territory.
Credit Pulse: market update – 16 July 2021
In our latest Credit Pulse, we look at bankruptcies and recovery rates, and present a case study on an energy fallen angel.