That incremental spread enhances portfolio carry and can add roughly 1–2 percentage points to expected returns above the mid-single-digit range typically associated with high-quality fixed income. Investors can capture that additional income without assuming the substantially greater default risk commonly associated with high-yield credit.

While rising interest rates have weighed on total returns, the weakness has been driven by rates rather than by deteriorating credit conditions. Investment-grade corporates have generated roughly 0.5% of positive excess return versus Treasuries year to date, reinforcing our view that corporates have been the relatively stronger allocation in a difficult rate environment.

Higher yields, new money

Higher yields strengthen the case for putting new money to work in bonds, even if interest rates remain elevated. Earlier this year, investors often could not find 6% yields in higher-quality high-yield bonds; now they can find that level of income in straightforward investment-grade corporate credit.

We expect rates to stay higher for longer rather than quickly returning to the exceptionally low-rate environment that followed the global financial crisis. That may result in modestly negative total returns for the year, but it also gives investors deploying fresh capital an opportunity to earn a more meaningful coupon over time.

The opportunity does not depend on an imminent rally in bond prices. Investors who can tolerate near-term price volatility may benefit from holding through the rate cycle, collecting higher income, and adding to allocations while yields remain attractive.

AI debt boom

The financing of AI infrastructure is emerging as a major credit-market story. Hyperscalers and technology companies are committing substantial capital to data centers, chips, and related infrastructure, yet the debt used to fund those investments will not necessarily be issued solely as conventional investment-grade corporate bonds.

We are seeing issuers use multiple financing channels, including structured, off-balance-sheet, and project-oriented debt. A company may have conventional rated corporate debt while financing particular assets or chip purchases through separately structured transactions that carry higher spreads and may not be rated by the major rating agencies.

This financing mix may help moderate the amount of new supply entering the traditional investment-grade market. At the same time, it requires investors to assess the issuer’s broader obligations, not just debt issued directly by the parent company, because off-balance-sheet commitments, complex financing structures, and deal documentation can affect credit quality and appropriate spread levels.

The central question is whether investors are being paid adequately for the incremental hyperscaler, technology, and data-center project risk they are assuming. We are taking a selective, name-by-name approach: examining structural protections, guarantees, and documentation provisions that may affect bondholder recourse.

Why long corporates are back

Long-duration corporates have become more attractive because investors can earn yields close to 7% in 10- and 30-year maturities. While long-term Treasury rates could move higher, long-horizon investors who can hold through volatility have an opportunity to lock in elevated coupons for an extended period.

Pensions and insurers are natural buyers because they often aim to match asset duration with long-dated liabilities. We are seeing the strongest demand in 10- and 30-year corporates, including from pension funds that are de-risking by shifting some assets from equities to bonds as their funded status improves.

The supply backdrop adds support. Many companies issued substantial long-term debt when borrowing costs were lower after the pandemic, reducing their need to issue far out the maturity curve today; issuance has therefore tilted toward shorter maturities. Limited 30-year issuance in September and early October has contributed to a favorable supply-demand imbalance and helped long-dated corporates hold up well.

For diversified portfolios, long-duration corporates can also help restore fixed income’s role as a counterweight to equities. We remain attentive to fiscal pressures that could affect the long end of the Treasury curve, but see long-duration, A-rated corporates as an increasingly relevant component of a balanced portfolio.