Why High-Quality Corporates Still Make Sense for Defined Benefit Plans

Fixed Income Portfolio Specialist

Investment grade (IG) corporate spreads have rallied year-to-date, with the Bloomberg (BBG) Barclays U.S. Investment Grade Corporate Index ending July at its tightest spread level since 2005. In addition, spreads have performed strongly year-to-date despite increased supply and bouts of equity volatility, raising the question of whether markets are taking all the risks of the asset class into account.

The steady march tighter in IG spread levels since the depths of the pandemic has resulted in less spread differentiation between ratings buckets. The difference in spreads between A and BBB has tightened, making it less compelling to reach for yield by moving from A+ debt down to BBB or below. This decreased compensation for taking on additional credit risk now is another factor in support of higher quality credit.

In this piece, we provide our perspective on the justification for defined benefit (DB) plans to maintain a high quality corporate allocation.