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Investment grade credit

Investment grade credit

August 2026 review and outlook

Market environment

US corporate spreads were unchanged at 78bp option-adjusted spread (OAS), with total returns of 0.43% and excess returns of 0.12%. The index yield increased 3bp to 5.49%. From a sector perspective, cable and satellite, wirelines, and independent energy led monthly sector performance, while P&C Insurance, Health Insurance, and Tobacco lagged. A-rated bonds were unchanged, while BBB-rated bonds tightened 1bp. Credit curves remained flat, with both intermediate and long-dated maturities unchanged during the month.

High yield spreads tightened 18bp to +261bp, with total returns of 0.97%. The high yield index yield declined 14bp to 7.27%. Brokerage asset managers/exchanges, pharmaceuticals, and transportation services led sector performance, while wirelines, P&C Insurance, and electric utilities underperformed.

At the Jackson Hole Economic Policy Symposium, Fed Chair Kevin Warsh reaffirmed that the central bank’s 2% inflation objective remained a “firm, fixed target” and said recent improvements did not demonstrate that underlying inflation had meaningfully declined. Headline CPI eased from 3.5% to 3.4% year-over-year in July while headline PCE was unchanged at 3.7%. Core CPI declined from 2.6% to 2.5% year-over-year while core PCE remained at 3.3%.

Nonfarm payrolls declined by 23,000 in July, following an increase of 57,000 in June. The unemployment rate fell from 4.2% to 4.1%, albeit this largely reflected a fall in the labor market participation rate. Job losses were concentrated in local government, education, and retail trade, partly offset by continued hiring in healthcare. Weekly jobless claims remained relatively subdued and stable during the month. The second estimate of Q2 US GDP was unrevised, showing growth slowing from 2.1% to 1.5% SAAR, with consumer spending revised higher.

Outlook

We continue to maintain a benign outlook for the US economy and believe a combination of expansionary fiscal policy and the ongoing AI investment cycle should provide meaningful support for growth. In our view, GDP should expand by approximately 2.0% in both 2026 and 2027. We expect inflation to average roughly 3.4% this year before moderating to 2.5% in 2027. We believe the risk of a sustained oil price shock skews the near-term balance of risks to our growth forecast to the downside. At the same time, incoming data continues to support our broader view that inflation pressures are gradually easing, although there remains a risk that inflation proves more persistent than we currently forecast. Markets are currently pricing in a potential increase as early as September. We expect 10-year Treasury yields to remain volatile but should ultimately decline toward 4.40% over the next year. Yields at shorter maturities are also expected to gradually move below 4%.

Technicals

August US investment grade corporate issuance totaled $148.3bn, another record for the month. Year-to-date issuance is up 35% year-over-year, driven primarily by the hyperscalers and the financial sector. With Labor Day falling later than usual this year, a portion of projected September issuance was likely pulled forward into August. Historically, September is the largest month of the year for corporate bond issuance. Inflows into investment grade funds remained robust at $28.7bn during the month, helping absorb a portion of the elevated new-issue supply. The Treasury curve flattened modestly.

Fundamentals

Investment grade fundamentals remain strong in our view, supported by continued earnings growth. Liquidity conditions also remain potentially favorable, supported by strong free cashflow generation and continued access to capital markets. However, capital expenditures among technology and communications companies continue to rise, contributing to additional debt issuance. At the same time, several AI-related hyperscalers have also raised equity capital, reflecting a balanced approach to funding growing capital expenditure requirements.

Risks

  • Increased debt-funded CAPEX and M&A
  • Weaker employment data weighing on consumer spending
  • Elevated geopolitical tensions
  • Higher oil prices pressuring both growth and inflation
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