Five Reasons to Consider IG Credit in 2024
Given normalizing yield levels, attractive total return potential and ongoing uncertainties, there is a compelling case to be made for IG credit in the year ahead.
After one of the most challenging years ever for fixed income returns in 2022, investment grade (IG) credit staged a partial comeback in 2023 with total returns of 8.7%.1 This is within the context of a market that has grown nearly three-fold since the Global Financial Crisis (GFC), to $15 trillion, when prevailing yields were last at the levels seen today.2 With nearly 20,000 securities to choose from, global IG credit is also a liquid and diverse market offering a wide range of investment opportunities—across different issuers, geographies, maturities, currencies and even levels of seniority.
Does the positive momentum building across the asset class signify the beginning of a renaissance for IG credit? It’s certainly possible, in our view, for five key reasons.
1. Cash is No Longer King—It’s Time to Put it to Work
Over the past two years, with the U.S. Federal Reserve (Fed) rapidly raising interest rates, the term premium in bond markets, i.e., the additional yield that investors expect from owning riskier, longer-duration bonds, has hovered in predominantly negative territory. In other words, investors were being asked to pay to assume more interest rate risk, rather than being paid for it. The negative term premium, coupled with the inverted yield curve, has meant that cash has become an increasingly larger part of investor asset allocations. Indeed, money market funds witnessed record flows of more than $1.2 trillion in 2023. Waiting on the sidelines, in cash, made sense during this rapidly rising-rate environment. But with the Fed likely at or near peak rates, and consensus estimates pointing to lower policy rates this year and into 2025, we believe it is time to put the cash back to work into assets that can offer attractive total return potential, such as IG credit.
1. Source: Bloomberg. As of December 31, 2023.
2. Source: Bloomberg. As of January 31, 2024.
