Global investment grade: Finding opportunities in an uncertain world

May 16, 2025

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Global credit markets continue to grapple with renewed volatility driven by US policy shifts, geopolitical tensions and uneven fiscal responses across regions. Ian Horn and Anthony DeMeo discuss some of the recent changes in credit markets and how the opportunity set has evolved.

Volatility is a given in financial markets. Uncertainty can be triggered by anything from geopolitics to financial events, pandemics and policy missteps, to name a few. The latest episode to roil markets has been driven by the US administration’s efforts to prioritize domestic growth, economic independence and national sovereignty.

The old “short-term pain, long-term gain” adage seems applicable to the current situation as Trump 2.0 aims to reset the globalisation playbook - most recently via tariff announcements in early April that sent global markets into a tailspin, even denting the traditional haven status of US government bonds. While stock markets bore the brunt of the volatility, credit markets also experienced meaningful moves —particularly at the front end of curves as investors sought to raise cash. 

While markets have recovered somewhat since 9th April, when the US announced a 90-day reprieve on higher tariffs and showed willingness to negotiate on the final tariff terms, uncertainties remain. In this environment, investors are confronted by a dual imperative: to stay nimble and find opportunities without taking too much risk.

Still a long and short story

Looking at the recent sell-off in a broader context, the magnitude of the spread widening was relatively modest when assessed over the last decade, as Figure 1 illustrates.

Recent spread widening, which was particularly evident at the short end, has created targeted opportunities. In particular, US investment grade (IG) spreads have widened meaningfully in shorter maturities as investors raised cash through short-dated credit.

However, we also continue to see opportunities in US longer-duration exposure. On a yield basis, US investment grade credit is currently close to the top quintile seen in the last 10 years, potentially highlighting an attractive entry point.¹

While concerns around de-dollarisation and the US’s reserve currency status are valid, they do not appear to be meaningfully priced into Treasury markets. We also believe the Federal Reserve would likely step in should long-end rates approach 5% again - a scenario likely to correspond with significant equity market pressure.

Indeed, 30-year Treasuries outperformed other US fixed income segments from 11th-30th April, returning 3.6%²  - outpacing high yield (2.8%)³ and BBB-rated investment grade (2.9%).⁴ We believe these dynamics should be supportive of higher-quality duration exposure, especially in portfolios where rate sensitivity is a strategic asset.

However, credit fundamentals are more difficult to assess given many major US corporations are withdrawing forward guidance due to uncertainty around final tariff outcomes. While the pricing effects have yet to materialize, even in a moderated form we see a strong likelihood of weaker demand, which would bring hard economic data in line with what is already implied in soft survey data.

As such, our bias remains towards higher-quality issuers - especially single-A and strong BBB names with resilient business models and healthy balance sheets. We favour front-end carry combined with high-quality rate convexity exposure in the long end, leaving us slightly overweight US duration in our regular duration strategies.

Fiscal headwinds in Europe, but monetary tailwind

In Europe, the year began with robust technicals – limited issuance and strong demand. That theme was interrupted in April when we saw sharp outflows from European credit given the broad risk-off sentiment, although inflows to both investment grade and high yield now appear to be resuming.⁵

We have reduced our European duration, reflecting expectations the recent safe-haven rally will ultimately reverse, as the well-flagged fiscal announcements ultimately translate into elevated government borrowing.

These issuance concerns, coupled with steady rate cuts from the European Central Bank, have resulted in a re-steepening yield curve in Europe. This has introduced the opportunity to capture additional roll-down returns that were not available whilst yield curves were flat or even inverted (see Return of the roll-down). Furthermore, monetary policy easing and increased government spending should help sentiment in Europe - a trade deal with the US would also increase visibility for European corporates.

As a result, while rates may remain volatile, in Europe the point of peak uncertainty is likely behind us now. Unfortunately, however, the spread-widening observed hasn’t necessarily thrown up a huge number of buying opportunities – particularly in investment grade. Spread moves have been relatively contained – as mentioned above – but we see better value in the 1-5 year part of the market. Here, investors can also position to capture the additional roll-down returns as bond yields steadily decline as they approach maturity.

The steepening of the Bund curve has resulted in the yield premium we had previously identified in GBP credit disappearing. As a result, we have started rotating out of sterling-denominated bonds and reallocating to euro-denominated credit. In particular, we see opportunities in peripheral issuers that often have a defensive and more domestic bias and are thus better insulated from US tariffs.

Bank on it

Banking has been one of our preferred sectors for several years, in no small part due to the strict regulatory environment that has continued to evolve since the Global Financial Crisis. Banks also offer what we view as an attractive spread premium over the broader corporate market – something that increased following ‘Liberation Day’ turbulence⁶  - especially given this sector appears more insulated from tariff pressures (Figure 6).

We also look at the relative value of different securities within the sector, for example, Tier 2 instruments versus senior debt. While that premium had been on a compression trend, we have seen some decompression following US tariff announcements, which we believe is presenting new opportunities.

Making the most of change

A lot has changed in a very short space of time, and change is likely to be the dominant theme for the remainder of 2025. As active credit managers, we believe this can play to our strengths. In any given year, our aim is to identify changes in the market environment that could present new opportunities and risks and invest accordingly.

References

1. ICE Index platform, as of 29th April. ICE BofA US Corporate Index (C0A0))
2. ICE Index platform, as of 29th April 2025. ICE BofA Current 30-Year US Treasury Index (GA30)
3. ICE Index platform, as of 29th April 2025. ICE BofA US High Yield Cash Pay Index (J0A0)
4. ICE Index platform, as of 29th April. ICE BofA BBB US Corporate Index (C0A4)
5. JP Morgan, as of 2nd May 2025. European credit fund flows weekly update.
6. ICE Index Platform, as of 30th April 2025. ICE Data Platform, as of 17th April 2025. ICE BofA Euro Financial Index (EB00), ICE BofA Euro Non-Financial Index (EN00).

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of May 2025 and may change without notice.

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Index descriptions

C0A0 - The ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

ER00 – The ICE BofA Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million. 

J0A0 - The ICE BofA US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

HE00 - The ICE BofA Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.  

ICE BofA 1-3 Year US Corporate Index (C1A0) ICE BofA 1-3 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity less than 3 years

ICE BofA 3-5 Year US Corporate Index (C2A0) ICE BofA 3-5 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

ICE BofA 5-7 Year US Corporate Index (C3A0) ICE BofA 5-7 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

ICE BofA 7-10 Year US Corporate Index (C4A0) ICE BofA 7-10 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

ICE BofA 10-15 Year US Corporate Index (C7A0) is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 10 years and less than 15 years.

ICE BofA 15+ Year US Corporate Index (C8A0) is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 15 years.

ICE BofA 1-3 Year US Treasury & Agency Index (G1A0) is a subset of ICE BofA US Treasury & Agency Index including all securities with a remaining term to final maturity less than 3 years.

ICE BofA Current 30-Year US Treasury Index (GA30)  is a one-security index comprised of the most recently issued 30-year US Treasury bond. The index is rebalanced monthly. In order to qualify for including, a 30-year bond must be auctioned on or before the third business day before the last business day of the month and settled before the following calendar month end.

C0A4 - The ICE BofA  BBB US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities rated BBB1 through BBB3, inclusive.

GA30 - ICE BofA Current 30-Year US Treasury Index (GA30) ICE BofA Current 30-Year US Treasury Index is a one-security index comprised of the most recently issued 30-year US Treasury bond. The index is rebalanced monthly. In order to qualify for inclusion, a 30-year bond must be auctioned on or before the third business day before the last business day of the month and settle before the following calendar month end.

ER01 – The ICE BofA  1-3 Year Euro Corporate Index is a subset of ICE BofA  Euro Corporate Index (ER00) including all securities with a remaining term to maturity less than 3 years.

ER02 - ICE BofA  3-5 Year Euro Corporate Index is a subset of ICE BofA  Euro Corporate Index (ER00) including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

ER03 -ICE BofA 5-7 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

ER04 - ICE BofA 7-10 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

ER09 - ICE BofA 10+ Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 10 years.

ICE BofA 1-5 Year US Corporate Index (CVA0) is a subset of the ICE BofA US Corporate Index including all securities with a remaining term to final maturity less than 5 years.

ICE BofA 1-5 Year Euro Corporate Index (ER0V) is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity less than 5 years.

ICE BofA 1-5 Year Sterling Corporate Index (UR0V) is a subset of ICE BofA Sterling Corporate Index including all securities with a remaining term to final maturity less than 5 years.

FXHCEUGB Index – Bloomberg EURGBP 3 Month Hedging Cost shows the three-month euro hedge cost for pound-based investors on an annualised basis. This is based on the assumption the investors sell pounds to buy euros in the spot market and simultaneously sell euros in the forward market to buy back pound.

FXHCEUUS Index -Bloomberg EURUSD 3 Month Hedging Cost shows the three-month euro hedge cost for dollar-based investors on an annualised basis. This is based on the assumption the investors sell dollars to buy euros in the spot market and simultaneously sell euros in the forward market to buy back dollars.

EB00 -The ICE BofA Euro Financial Index tracks the performance of EUR denominated investment grade debt publicly issued by financial institutions in the eurobond or Euro member domestic markets.

EN00 -The ICE BofA Euro Non-Financial Index tracks the performance of non-financial EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

EBXS – The ICE BofA Unsubordinated Euro Financial Index is a subset of ICE BofA Euro Financial Index excluding all subordinated securities.

EBSL - ICE BofA Euro Financial Subordinated & Lower Tier-2 Index is a subset of the ICE BofA Euro Financial Index including all subordinated and tier 2 securities.

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