Opportunities in investment-grade credit

During the third quarter of 2022, corporate margins slimmed due to rising costs, while sentiment worsened for investment-grade credit as the war continues in Ukraine, labour costs are rising, and supply chain issues linger. On the other hand, the rally in the US dollar has brought uncertainty in the earnings outlook of investment-grade companies.

Investment-grade corporate bonds saw declines in Q3 of 2022, but Barings says that current yield and spread levels, coupled with the durable credit profile of issuers make investment-grade credit attractive from a valuation perspective.

The investment management firm says that while revenue, earnings and profit margins have eroded, investment-grade corporates are seeing a reduction in leverage levels.

“As corporate debt levels have decreased, interest expenses have also come down. At the same time, interest coverage has increased, helping maintain accumulated balance sheet strength,” says Barings.

On the technical side, new issues have slowed down, indicating that corporates can manage the rate hike cycle without increasing their debt. Additionally, demand from investors has been lower despite a spike in yields.

The critical point Barings makes is the widening spreads in the investment grade credit market, which the investment management firm sees as providing attractive buying opportunities. “New issues, some with sizeable concessions, from larger U.S. money center banks, regional banks, and banks in Asia and Europe have provided compelling opportunities, particularly in shorter-duration credits,” says Barings.