Credit spreads are tight – and why this may not change soon

Corporate credit is marked by tight credit spreads driven by strong fundamentals and positive rating actions. In this fixed income–focused podcast, Natixis Investment Managers Solutions’ Mark Cintolo and Kevin McCullough discuss credit spreads and why they believe it makes sense to have credit risk in your portfolio.

Key takeaways

• Corporate credit fundamentals are strong, with high average credit quality and low default rates.
• Credit spreads remain tight due to positive rating actions and a healthy economic backdrop.
• Long-term corporate debt offers attractive yield opportunities despite potential spread widening.

Strong corporate credit fundamentals 

Corporate credit fundamentals are robust, with the corporate credit index experiencing a 10-year low in terms of duration, making it less sensitive to interest rate changes. The average credit quality is at its highest since the first quarter of 2018, and defaults are lower than historical averages across all credit qualities. "The fundamentals in corporate credit, for lack of a better word, are good across the board," says McCullough.

Credit spreads remain tight, and the asymmetric potential for future returns has many investors cautious. "By some metrics, credit sentiment looks poor, but surveys indicate people still plan to add to IG [investment grade] credit," Cintolo explains. Investors might expect spreads to drift modestly higher, but the yield cushion provides some breathing room. You could also see a sell-off in equity markets without triggering a credit event. 

Opportunities in long-term corporate debt

Duration has been a headwind to fixed income performance over the past couple of years, but spreads remain tight because investors are more worried about inflation than recession. "Maybe those fears are getting overblown at this point," says McCullough. Tariff policies could impact gross domestic product (GDP), but the health of corporate balance sheets suggests that high-quality corporations are unlikely to miss payments or get downgraded.

Despite potential spread widening, long-term corporate debt offers attractive yield opportunities. The long end of the corporate credit curve has seen less issuance, providing a more attractive yield cushion for investors willing to add duration to their portfolios. "The long end is usually higher quality than the intermediate side, as only the best companies are typically willing to issue really long-term debt," Cintolo adds. Even with modest spread widening, the price impact could be negligible due to the directional offset from Treasury yields.