Investment Grade Bonds: Lock in yields today with these lower-risk instruments

Fixed income markets delivered a strong performance in 2025 (Chart 1), boosted by falling benchmark yields, tightening credit spreads, and still-attractive all-in yield levels despite rate cuts. The Global Investment-Grade (IG) segment was among the weaker-performing sectors year-to-date but still recorded a solid 7.6% return in USD terms.

Fixed income assets benefited from growing rate cut expectations (later reinforced by actual cuts), which pushed yields lower. Meanwhile, credit spreads tightened due to a better-than-expected global growth backdrop. Overall, bond returns moderated in 2H25 but largely remained positive, underpinned by carry and a moderate spread tightening across the board.

As we step into 2026, we continue to favour investment-grade bonds. All-in yields remain decent even after this year’s rally, while the broader interest rate environment looks supportive as major central banks are expected to cut rates further. Against a backdrop of renewed trade and geopolitical uncertainties, we believe Global IG bonds could act as a stabilising core for a diversified portfolio, offering a safer risk-return profile compared to equities or high-yield bonds.

Chart 1: Strong performances across fixed income markets in 2025

1. Fundamentals are stable, with fallen angels still a rarity

Corporate fundamentals across IG issuers remain broadly stable. Profitability broadly held up well over the past 12 months compared to the previous year, with the global economy also demonstrating resilience. Major global banks, which represent some of the larger exposures within the Global IG bond universe, reported strong earnings, reinforcing their credit profiles.

Credit metrics tell a similar story. Debt ratios like debt-to-EBITDA or debt-to-equity were broadly stable over the past 12 months with no meaningful deterioration. Interest coverage ratios also remained stable, likely helped by improving profitability and a backdrop of lower borrowing costs. Credit rating activity affirmed this narrative of resilient fundamentals, with S&P rating actions broadly stabilising in 2025 across key geographies like the US and Western Europe (Chart 2).

Looking ahead, maturities within the Global IG Corporate space look well-distributed and manageable. Many issuers already took advantage of falling yields last year to refinance their debt. As such, no single year accounts for a disproportionate share of maturities, which could constitute a steep maturity wall that would otherwise pressure issuer balance sheets (Chart 3). Against this backdrop of improved funding conditions, we expect IG issuers to remain solid and successfully refinance their 2026 maturities.

Chart 2: Credit rating actions have turned more positive across major regions

Chart 3: IG Corporate maturities look well-distributed

2. All-in yields remain attractive and may support forward returns

All-in yields for Global IG bonds remain appealing relative to history, sitting comfortably above pre-pandemic averages (Chart 4). For many investors, decent yields around 3.5% help to provide a meaningful source of carry and anchor portfolio returns, especially in today’s more volatile asset markets.

Long-term investors may still find compelling entry points into IG bonds today. Higher yields have historically shown a positive correlation with forward returns (Chart 5). Allocating to IG bonds at higher yield levels has the potential to translate into attractive long-term performance. For illustration, inputting 3.5% yields into this linear correlation would imply forward returns of 5.8%, while inputting 4.5% yields would imply forward returns of 8.0%.

We broadly expect yields to remain stable across major markets in 2026, and this should ultimately support income and total returns for bond investors. Apart from Japan, the likelihood of renewed monetary tightening by major central banks appears low, with inflation down significantly from peaks and the macroeconomic outlook remaining uncertain. Meanwhile, credit spreads are not expected to widen significantly due to still-resilient fundamentals, which should reduce any upward pressure on all-in yields.

Chart 4: All-in yields look appealing relative to history, especially versus the post-GFC era

Chart 5: Higher yields (yield-to-worst) historically help to support forward returns

3. Spreads are tight, but opportunities remain

Investment-grade credit spreads look tight relative to long-term averages (Chart 6). This reflects the resilience of corporate balance sheets and sustained investor appetite for high-quality income. While spreads widened in 2022 amid aggressive Fed hikes and recession fears, they have since retraced and fallen as the global economy proved more resilient than expected.

Looking ahead to 2026, we do not expect spreads to widen much. Global economic growth is slowing but remains steady with no immediate signs of a sharp downturn. At the same time, IG issuer fundamentals are solid with no major refinancing pressures this year. In this environment, demand for IG credit should remain robust as it provides a reliable source of high-quality income, helping to keep spreads well anchored.

Finally, it is worth noting that tight credit spreads are not limited to IG bonds and are even more pronounced for high-yield (HY) bonds. Global HY bonds currently offer a mere 215 bps pickup over Global IG Corporate bonds which is much lower than historical levels. As credit spreads represent investors’ compensation for credit risk, this relatively modest 215 bps premium makes the trade-off for taking on HY risk less compelling (Chart 7).

When credit spreads widen, typically during market selloffs, investors often face mark-to-market losses. In such a scenario, IG bonds are likely to see a smaller extent of spread widening versus HY bonds, resulting in more limited losses (Chart 8). This reflects the greater vulnerability of weaker HY issuers and the market’s tendency to seek safety in higher-quality bonds, in a classic ‘flight to safety’ move.

Chart 6: IG Corporate spreads are near cycle lows

Chart 7: Yield pickup for high-yield over investment-grade bonds is also near cycle lows

Chart 8: HY bonds are more vulnerable to spread widening than IG bonds in periods of market stress

4. Our preference for Global IG bonds

Investors typically view the IG bond universe by geographical regions. Hence, our analysis below looks at both Global and Asia IG bonds.

Both the Global and Asia IG bond universes are highly diversified across sectors, though there are slight differences in their largest exposures. Global IG has larger exposures to Financials and Consumer names (cyclical and non-cyclical), while Asia IG has larger exposures to Financials and IT names, including China’s biggest tech companies. We think investors will be able to find a diversified range of opportunities in either Global or Asia IG bonds.

However, on a broad market level, we prefer Global IG bonds over their Asia IG counterparts due to more attractive yields and relative valuations. Global IG Corporate spreads are currently around -0.8 standard deviations below historical averages, while Asia IG spreads are much tighter, around -1.9 standard deviations below average (Chart 9), signalling richer valuations for the latter. The yield advantage that Asia IG bonds once provided has also largely diminished over time on an index level (Chart 10).

To be clear, this view reflects our overall market preference and should not be interpreted as a reason to overlook Asia IG bonds entirely. The Asia IG segment contains over 2000 distinct USD-denominated bonds, providing ample opportunities for investors to pick from, as highlighted in our recommendations in the next section.

Chart 9: Asia IG bond universe is trading very tight – more so than Global IG

Chart 10: Yield pickup for Asia IG has narrowed significantly, now close to zero

Final thoughts and recommendations

To summarise, we think investment-grade bonds remain an important part of any diversified portfolio. Investment-grade bonds offer attractive carry (from all-in yields), and the potential for further gains if Fed rates continue to fall in 2026. Furthermore, corporate fundamentals look resilient, and we think investment-grade corporates are well-positioned to refinance maturing debt this year.

In this environment of tight spreads, issuer and credit selection are paramount. USD-denominated IG bonds can have yields ranging from 4% to 5+% in each credit rating bucket, illustrating the dispersion in yields and therefore the potential gains from careful credit selection (Chart 11). Investors who are comfortable with adding duration will also find that US corporate curves look steeper than Treasury curves, giving them more opportunities with larger spreads and yields (Chart 12).

Chart 11: Credit selection may allow you to identify higher-yielding opportunities within the same credit rating bucket

Chart 12: Corporate bonds offer a greater pickup for adding on duration

We provide a list of fund recommendations below (Table 1): all of these have average credit ratings within the investment-grade territory, and can serve as a great starting point for any investor.

Table 1: Fund recommendations to consider

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities.