Investment grade bonds remain in demand thanks to tactical advantages

Numerous arguments speak in favour of corporate bonds 

On closer inspection, the observed investor behaviour becomes easier to understand: the era of risk-free government bonds is over. Fiscal expansion and soaring political uncertainty have led to significantly higher volatility in US government bonds. In addition, their yield premium over the USD swap rate has almost tripled since 2021. The swap rate is the interest rate at which banks lend to each other. Depending on the credit rating of the government, government bonds pay less (better credit rating) or more yield (poorer credit rating) than participants in the swap market for the same currency.   

Since Moody's downgraded the United States in mid-May 2025, it has become clear that the creditworthiness of US government bonds has deteriorated significantly. Against this backdrop, companies with an investment grade (IG) rating are becoming more attractive thanks to their solid fundamentals. This is not least due to the positive rating development: the average rating of the asset class has risen steadily recently, and the proportion of IG companies with the lowest rating (BBB-) has fallen from 13 to 10 per cent in the global universe over the last four years. In this context, it is logical that risk premiums are falling compared to government bonds.   

An exceptional risk/return ratio 

In addition to their fundamental advantages, IG corporate bonds also score highly in quantitative terms: thanks to their credit risk premium, corporate bonds continue to offer a higher expected return than government bonds. Furthermore, they are historically less volatile and much more broadly diversified than comparable government securities. 

The positioning on the yield curve also makes corporate bonds particularly attractive at present: the combination of economic slowdown and expected fiscal expansion has already significantly altered the shape of the yield curve in recent weeks. Interest rates for short and medium maturities (up to five years) have fallen significantly since the beginning of the year, while long-term interest rates (20-30 years) have been driven up. Swiss Life Asset Managers believes this trend is likely to continue, as yield curves in the major currency areas are still flatter than their long-term average. In the past, these curves have risen steeply, particularly during and after periods of economic weakness. Those who invest in corporate bonds in this environment will benefit more from the normalisation of the still flat yield curves, as the corporate bond market has a larger proportion of short-term bonds than the government bond market. This means that investors with an allocation to corporate bonds can tactically play the short-term segment while benefiting from the advantages mentioned above due to the current fundamentals. 

Improved liquidity 

Another factor in favour of corporate bonds and a further reduction in risk premiums is that liquidity in the corporate bond market has improved significantly in recent years. Thanks to new technologies such as peer-to-peer and portfolio trading, trading volumes have increased significantly and bid-ask spreads and liquidity concentration have decreased.   

The attractive yield to maturity, the tactical opportunity relative to government bonds and the economic conditions argue in favour of a substantial allocation to corporate bonds, especially at the short end of the maturity spectrum. The corporate bond market is an OTC (over-the-counter) market, which means that pricing does not take place on a central exchange. It is normally the case that the large number of issuers and structures, as well as certain liquidity considerations, greatly complicate investment decisions. As an active manager, Swiss Life Asset Managers sees great potential in this challenge and exploits these opportunities for its clients in a targeted manner.   

This document was created by a legal entity of the Swiss Life Asset Managers business division (hereinafter "Swiss Life Asset Managers"). This document is intended solely for marketing and informational purposes.

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