Q&A Series: Barings on Navigating Tight Credit Spreads and Finding Value in 2027

The Barings Global Investment Grade Credit Fund (USD) seeks to generate attractive risk-adjusted returns by investing primarily in investment-grade corporate bonds across global markets.

The fund adopts an active, bottom-up investment approach, focusing on fundamental credit research, issuer selection and relative-value opportunities. Its investment team assesses factors such as an issuer’s financial strength, cash flow generation, leverage and liquidity to identify bonds offering attractive compensation for their underlying risks.

Rather than relying on broad market or interest-rate forecasts, the fund emphasises individual security selection and disciplined risk management. Its globally diversified portfolio aims to generate income while managing downside risks, with the flexibility to capitalise on market dislocations and changing credit valuations.

1.      Over the past year, what’s the most significant change you’ve made to the fund’s positioning, and what drove it?

Over the past year, investment-grade credit markets have navigated a more volatile backdrop, reflecting geopolitical uncertainty, concerns around parts of the private credit market, a meaningful increase in AI-related issuance, and, more recently, higher government bond yields. Against this backdrop, we have maintained a disciplined approach to risk, gradually reducing the portfolio’s overall credit spread duration while remaining selective in the deployment of risk.

From an interest-rate perspective, portfolio construction remains predominantly bottom-up, with limited reliance on top-down macro or duration views. In fact, we do not take active duration risk, with interest-rate duration hedged daily to remain aligned with the benchmark. As a result, our focus is principally on issuer selection, cusip selection and relative value within credit markets. This bottom-up orientation also means that sector positioning is often the aggregate outcome of individual security-level decisions rather than a predetermined top-down allocation.

As of September 2026, Financials remain an area where we continue to identify attractive relative value, including across banks, but more importantly, across smaller insurance companies and specialty finance issuers. These opportunities have resulted in an overweight to Financials relative to the benchmark, one that we have broadly maintained over the course of the year.

Within Industrials, we entered the year with a more cautious stance, particularly given expectations that elevated capital expenditure among hyperscalers would translate into substantial issuance in the investment-grade market. As that supply has materialized and spreads in parts of the sector have repriced, we have selectively explored adding exposure where wider spreads provide what we believe to be more attractive compensation for fundamentally strong credits. This too has been an issuer and security-level decision, as opposed to a fundamental view on hyperscalers broadly.

Overall, our approach remains centered on constructing highly diversified portfolios, maintaining modest single-issuer exposures and managing aggregate credit risk carefully. While we are prepared to take advantage of valuation dislocations as they emerge, we continue to emphasize disciplined security selection and have deliberately reduced spread duration at the portfolio level.

2.      With US Treasury yields remaining elevated and uncertainty surrounding the Fed’s next moves, how is the team managing the fund’s duration exposure? Do you see greater opportunities in short- or long-duration investment-grade bonds?

As noted in the earlier, our approach is predominantly bottom-up driven, and we do not take active interest rate duration or currency risk in our portfolios. In fact, interest rate duration is hedged daily to match the fund’s benchmark.

Instead, spread duration is the primary lever through which we express our overall risk posture, and we have progressively reduced this exposure over the past year. Today, the portfolio’s spread-duration profile is increasingly concentrated toward the front end of the credit curve, where we believe risk-adjusted return potential is more compelling.

In particular, we continue to identify attractive opportunities in shorter-duration BBB-rated credit. Elevated Treasury yields provide a strong underlying level of income, while shorter maturities reduce both spread-duration exposure and the potential for mark-to-market volatility. Select BBB-rated securities can also provide attractive spread carry and pull-to-par potential, particularly where our fundamental research identifies issuers with resilient cash flows, manageable leverage, ample liquidity and a credible path to maintaining or improving credit quality.

Conversely, we remain selective in longer-duration investment-grade credit. Credit curves have become increasingly differentiated, and we believe some of the apparent spread premium at the long end reflects issuer-specific supply concessions rather than broad-based compensation for assuming additional spread-duration risk. As a result, we continue to assess opportunities security by security rather than interpreting wider long-end spreads as a generalized signal of value.

3.      How does Barings’ active investment approach help the fund stay ahead of changing market conditions? What differentiates the team’s credit selection process from its peers?

Barings’ active investment approach helps the Fund stay ahead of changing market conditions by linking forward-looking fundamental credit research, continuous relative-value assessment and collaborative portfolio construction. Rather than relying on static ratings or backward-looking screens, the team combines bottom-up issuer analysis with an assessment of the macroeconomic, policy and market-technical forces that can affect credit fundamentals and bond valuations. Analysts continually monitor approved issuers, update financial models, test assumptions and revise recommendations as new information emerges. This gives portfolio managers a current view of where risks are building, where valuations may no longer compensate investors and where dislocations are creating attractive opportunities—supporting proactive changes to sector, issuer, maturity and security-level exposures before those shifts are fully reflected in market prices.

What differentiates Barings’ credit selection process is the depth, continuity and security-level specificity of its research. Global analysts specialise by sector and geography, and many have followed the same issuers through multiple credit cycles and periods of market stress. The work combines detailed quantitative analysis with experienced qualitative judgement, examining financial performance, cash-flow resilience, leverage, liquidity, capital allocation, capital structure and bond documentation alongside the issuer’s business model, competitive position, management strategy and industry outlook. The team also incorporates market factors, including investor flows, expected issuance, liquidity, technical positioning and potential mergers and acquisitions, so that it can distinguish between a strong company and a bond that offers genuinely attractive risk-adjusted value. This integrated fundamental and market perspective is designed to avoid the common peer pitfall of treating issuer quality and security valuation as the same decision.

The analysis results in explicit recommendations at the individual-security level not simply broad views on an issuer or sector. Analysts identify where to invest within an issuer’s capital structure, which maturities and currencies offer the most compelling relative value and what developments would strengthen or challenge the investment case. Investment Committee debate provides independent challenge, oversight and discipline around analyst recommendations and the maintenance of the approved buy list. Portfolio managers then translate those views into position sizes that reflect conviction, liquidity, downside risk, portfolio diversification and the Fund’s investment objectives. This combination of specialist ownership, documented security-level recommendations and structured challenge creates accountability while allowing the portfolio to act decisively when opportunities or risks emerge.

The close integration of research, portfolio management and trading further differentiates the approach and helps convert insight into timely action US and European teams interact daily, sharing perspectives on global companies and multi-currency issuance and comparing opportunities across regions and markets. Traders contribute real-time insight into liquidity, market technicals, pricing and execution, while a centralised portfolio management system makes research and recommendations available across the platform. As fundamentals, valuations and market conditions change, the team may resize positions, rotate between securities, rebalance sector or regional exposures and respond to new issuance while maintaining its core discipline. In combination, this research depth, global collaboration and security-level implementation are designed to help the Fund anticipate change rather than merely react to it, while maintaining a consistent focus on downside protection and attractive risk-adjusted return potential.

4.      With borrowing costs remaining elevated and economic growth facing uncertainty, are you seeing signs of deterioration in corporate credit fundamentals? How does the team identify potential credit risks early and avoid issuers that may ace rating downgrades?

At a broad market level, we are not seeing a material deterioration in investment-grade corporate credit fundamentals. Although borrowing costs remain elevated and the growth outlook is uncertain, many investment-grade issuers entered this period with resilient business models, ample liquidity and healthy balance sheets. In our view, most have the financial flexibility to absorb higher interest expense and manage upcoming refinancing needs, particularly given the generally well-laddered maturity profiles established when funding costs were lower. That said, aggregate stability masks meaningful dispersion across sectors, industries and individual issuers, making disciplined security selection increasingly important.

Our analysts seek to identify potential credit risks well before they are reflected in ratings or market prices. As sector specialists, they continuously monitor each issuer’s operating performance, cash-flow generation, leverage, liquidity, interest coverage, capital-allocation decisions and access to funding. They also assess forward-looking indicators, including earnings revisions, margin pressure, refinancing requirements, covenant headroom, management behavior and changes in industry structure, to identify early signs that an issuer’s credit trajectory may be weakening. When deterioration emerges, analysts promptly communicate their revised outlook and recommendations to portfolio managers, allowing the team to reduce or avoid exposure before a potential downgrade becomes the market consensus.

This same active approach also helps us distinguish between genuine impairment and temporary market weakness. Periods of heightened dispersion can create opportunities when a fundamentally sound issuer is indiscriminately sold or when a security’s valuation overstates the underlying credit risk. By combining rigorous bottom-up research with relative-value analysis, the team can seek to avoid issuers facing structurally weakening fundamentals while selectively adding to beaten-up credits where we believe the market’s concerns are not warranted. In this way, active management is both defensive and opportunistic: it is designed to help mitigate downgrade risk while seeking to capitalize on mispricing created by changing market conditions.

5.      Beyond higher yields currently available in bond markets, what are the key drivers of the fund’s potential outperformance? Could you share an example of how Barings has identified an overlooked credit opportunity or capitalised on market mispricing?

With investment-grade spreads near historically tight levels, we expect the Fund’s near-term return potential to be driven primarily by disciplined carry and security selection rather than a broad-based compression in market spreads. The team seeks to build a diversified portfolio of high-conviction issuers that aims to provide a yield advantage over the benchmark while maintaining a strong focus on downside protection. Incremental total return may still be generated as selected issuer spreads tighten, but in the current environment we believe outperformance is more likely to come from repeatedly identifying securities that offer attractive compensation for their underlying fundamental and liquidity risks.

Importantly, the strategy is not designed simply to harvest the highest available yield. Instead, the portfolio’s yield advantage is intended to be the aggregate result of bottom-up investments in areas where our research identifies structural inefficiencies. These can include under-followed issuers receiving limited sell-side coverage, less-frequent or first-time borrowers, individual securities that are technically pressured, and catalyst-driven situations in which an identifiable event could improve the issuer’s credit profile or market valuation. This does not make the Fund a “small-cap” credit strategy; rather, it reflects a deliberate effort to invest across parts of the market where limited coverage, complexity or investor segmentation can create persistent mispricing.

An opportunity might arise when a fundamentally sound, infrequent issuer brings a new bond to market at a concession because investors are less familiar with the credit and the transaction requires additional price discovery. Through direct engagement with management, detailed balance-sheet and cash-flow analysis, and comparison with more widely followed peers, our analysts may conclude that the issuer’s leverage, liquidity and business resilience are stronger than the initial pricing implies. The Fund can then earn an attractive level of carry while retaining the potential for the bond’s spread to tighten as the market becomes more comfortable with the issuer. Similarly, the team may invest in a temporarily misunderstood credit when research indicates that the market has overreacted to a short-term concern and a credible catalyst, such as deleveraging, an asset sale, improved free-cash-flow generation or a change in capital allocation, can support a revaluation.

Barings’ advantage is therefore not dependent on making a single directional call on the credit market. Potential outperformance is expected to come from combining carry, rigorous issuer selection, security-level relative-value analysis and active portfolio rotation across a broad opportunity set. By identifying overlooked credits and distinguishing temporary dislocation from genuine fundamental impairment, the team seeks to capture yield and spread upside without compromising the Fund’s overall credit discipline.

6.      Looking ahead to 2027, what are the biggest risks and opportunities for global investment-grade bonds? How is the fund positioned to balance income generation, capital preservation and potential capital appreciation under different economic scenarios?

Looking ahead to 2027, the global investment-grade market presents a compelling but increasingly differentiated opportunity set. Elevated all-in yields continue to provide an attractive foundation for income generation, while resilient corporate fundamentals and broad global markets may create opportunities to add value through active sector, issuer, currency and security selection. At the same time, the outlook is complicated by uncertainty around the pace and extent of monetary-policy tightening, the durability of global growth, inflation, fiscal and geopolitical risks, heavy issuance and the potential for currently tight credit spreads to reprice. In this environment, we believe disciplined risk management and security selection will be more important than simply adding broad market exposure.

Reflecting these uncertainties, we have reduced the Fund’s total spread duration and currently maintain a shorter spread-duration profile than the overall index. Importantly, this more defensive posture has not required sacrificing income: the Fund currently carries an approximate 100-basis-point yield advantage relative to the index. This combination is intended to provide an income cushion while reducing sensitivity to spread widening, helping the Fund balance current income generation with capital preservation.

The positioning is also intended to remain resilient across a range of economic outcomes. In a soft-landing or moderate-growth scenario, the Fund’s yield advantage may support attractive carry, while active security selection can provide additional return potential. If growth weakens and government bond yields decline, duration exposure may contribute to capital appreciation, while the Fund’s shorter relative spread duration may help mitigate the effect of wider credit spreads. In a higher-for-longer or renewed inflation scenario, elevated income, selective exposure and lower spread-duration risk may provide a degree of protection against continued rate and spread volatility.

Finally, periods of market stress can create opportunities for active managers. By preserving risk capacity and maintaining flexibility, the team may be able to add exposure when dislocations push spreads and security valuations beyond what underlying fundamentals justify. Historically, selectively deploying capital during these periods has at times been a source of alpha for the Fund. Overall, the portfolio is positioned to seek attractive income today, aim to preserve capital through a more defensive spread-risk profile and retain the flexibility to pursue capital appreciation as economic conditions and valuations evolve.