Banks See Higher-Rated Bonds Beating Junk Debt for First Time Since 2020

The story could be different in 2024 as growth wanes and investors price in rate cuts.

“Continued compression in Treasury yields as a result of weakening macroeconomic conditions will facilitate strong duration-related returns, if realized,” Noel Hebert, credit strategist for Bloomberg Intelligence wrote in a December report.

He expects investment-grade bonds to hand investors gains in the mid- to high-single digit range.

Still, not all companies are bullish about high-grade debt. BlackRock Inc. is underweight global investment-grade credit, citing tight spreads that “don’t compensate for the expected hit to corporate balance sheets from rate hikes.”

Mitsubishi UFJ Financial Group is less optimistic about credit altogether. Its strategists warn that a potential downside could be substantial in the case of a “bumpy landing” and recommend that money managers wait to invest in the US fixed income.

“Even if we get large rate declines, as we expect, credit spreads and risk assets are pricing perfection,” strategists including George Goncalves wrote in a report last month. “From current levels, we see limited upside in total returns from pure-play credit products.”

But for institutional asset manager Robeco, uncertainty around the possibility of a recession later this year strengthens the case for investment-grade credit over high-yield debt.

“With overall yields in investment-grade credit still at attractive levels and with good return prospects, the asset class can compete with many other more risky classes,” Robeco’s Sander Bus and Reinout Schapers wrote in a report.