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Investment Grade Credit: Protected by the Central Bank Safety Net

While it has been a volatile year for investment grade credit, we still see a variety of factors that could support the asset class in the coming months, including yield premium, a degree of protection from central banks and easing supply.

Jason Simpson
Senior Fixed Income ETF Strategist

It has been a volatile year for investors in investment grade (IG) credit. The early 2020 surge in returns on the back of strong equities reversed sharply in March as the pandemic-induced panic saw the market seize up. However, the proactive stance taken by central banks, both in terms of a monetary policy response and actions to free up markets, caused financial assets to bounce back.

With central bank buying acting as a backstop, IG credit seemed to make sense for investors stuck between the rock of very low yields on government debt and the hard place of taking on high levels of credit or duration risk.

Spreads to government bonds tightened over the summer but have been more volatile since the start of September as the second wave of the pandemic has de-stabilised risk appetite. Investors now must consider the degree to which spreads can continue to narrow given the resurgence of COVID-19 is hampering what already looked like a slowing economic recovery.

Against this backdrop, and as we noted in the Q4 Bond Compass, there are four main reasons why we like IG credit exposures: yield premium, the degree of protection offered, stable corporate conditions and easing supply.

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