The investment-grade corporate bond market has largely returned to pre-pandemic levels. Strategists at CreditSights say that is a bad sign for investors looking for strong returns next year.
The independent credit-research shop downgraded the market to Underperform from Outperform. CreditSights argues that while the risk of an increase in defaults remains low, the market’s current yield of 1.9% offers insufficient income. The market yields 1.1 percentage points more than comparable Treasuries, compared with roughly 1 percentage point before the pandemic.
“Tight valuations leave little room for outperformance, and our expectation [is that] a ‘back to normal’ environment will have investors looking elsewhere for yield,” a team led by Erin Lyons, co-head of U.S. investment grade research, wrote in a note this month.
But even with low default rates, CreditSights says a few major risks remain. The strategists forecast that the market will likely provide a return of