Investment grade credit | Insight Investment

Market environment

The Bloomberg US Corporate Bond Index tightened by 5bp to an 83bp option adjusted spread (OAS) in June, delivering total returns of 1.87% and excess returns of 0.38%. The index yield declined 22bps to 4.99%. Top-performing sectors included independent energy, health insurance, and oil field services, while media-entertainment, construction machinery. Meanwhile, retailers lagged. A rated bonds tightened 3bp, and BBBs tightened 7bp. Credit curves flattened slightly, with intermediate and longer-dated spreads tightening 5bp and 6bp, respectively. 

European spreads narrowed 8bp to 92bp, generating total returns of 0.26% and excess returns of 0.46%. Leading sectors were life insurance, integrated energy, and natural gas, technology, consumer products, and diversified manufacturing underperformed. 

High yield spreads tightened 25bps to 290bp, with total returns of 1.84% and excess returns of 1.00%. Lower-quality CCC rated bonds outperformed, returning 2.31% versus 1.75% for BBs. The High Yield index yield fell 40bps to 7.06%. Fallen angels totaled $17bn, with $3.1bn in defaults, and no rising stars. 

US data showed limited change. Inflation remained steady with headline CPI at 2.8% and core CPI slightly up to 2.4%. Payrolls increased by 139,000, close to expectations, though prior data was revised down. Wage growth held at 3.9% year over year. The ISM Manufacturing PMI dipped to 48.5, and Services PMI fell below 50 for the first time in nearly a year. Consumer sentiment improved sharply, with the Michigan index rising to 60.7. The Federal Reserve (Fed) kept rates steady at 4.25%-4.50%, extending the pause to six months.

Outlook

Uncertainty around the US economic outlook remains elevated with the administration announcing new tariff rates. Leading indicators are neutral, suggesting limited directional clarity. We anticipate a moderate economic slowdown after strong momentum in 2024 and early 2025, with GDP growth forecast at 1.4% in 2025 and 1.2% in 2026. While a recession is not our base case, it remains a clear risk amid expected easing in the labor market. Inflation is trending downward gradually, with the CPI projected to be just below 3% in 2025, easing toward 2.5% in 2026. Trade tensions pose upside inflation risks and the Fed is expected to cut rates gradually, with a terminal funds rate near 3.25% by 2026. Legislative delays on the President’s “One Big Beautiful Bill Act” may influence Treasury yields and market dynamics. We expect a modest steepening of the yield curve.

Technicals

June investment-grade corporate issuance totaled $101.5bn, slightly above estimates. The average maturity of nine years in the first half of 2025 is the shortest since 2006, reflecting issuer preference for shorter duration amid a steep Treasury curve. Investment-grade credit funds saw $19.5bn inflows as risk sentiment improved and yields remained attractive above 5% for the majority of the month. Treasury yields declined across the curve, with 5-year yields down 16bps to 3.80%, 10-year down 17bps to 4.23%, and 30-year down 15bps to 4.78%.

Fundamentals

Credit fundamentals remain robust. Financial leverage for investment-grade issuers ticked down slightly, EBITDA margins are at record highs, and earnings growth remains above 10%. Some companies have withdrawn or lowered guidance due to tariff uncertainty, but earnings impacts have yet to materialize. Second-quarter earnings reports will provide clearer insights. Liquidity remains strong, with continued debt issuance despite April’s volatility spike.

Valuations

Investment-grade spreads have nearly fully retraced the widening seen after April’s tariff announcements (peak +119bp). While spreads remain historically tight, yields near 5% offer attractive entry points. Stable fundamentals and strong demand from yield-seeking investors should keep spreads range-bound near term, though tariff-related risks have increased.

Risks

• Geopolitical risks
• Tariff-related impacts on growth and inflation
• Rising debt-funded M&A and shareholder distributions