Multi-Asset Income Opportunities with an Inverted Yield Curve

In any environment, multi-asset investors should prudently balance risks across equity, corporate credit and government bonds. But near-term tactical shifts can help take advantage of ever-evolving market conditions in the pursuit of long-term returns.

With this in mind, we think today’s inverted yield curve has created a positive environment for short-term bonds—investment-grade corporate bonds, in particular. They offer compelling income potential along with relatively lower interest-rate risk, or duration, than longer-term bonds and safe-haven assets such as global treasuries. Short-duration investment-grade corporates, as measured by the Bloomberg Global Aggregate Corporate 1–3 Year Index, had a duration of 1.8 years and a yield to worst of 5.4% at midyear, yielding more than intermediate-term investment-grade bonds and global treasuries (Display).

Quality Is King as the Economic Outlook Firms Up

In addition to income potential, the short-duration investment-grade universe provides exposure to high-quality companies—with an average credit rating of BBB+. Since the pandemic, many credit issuers are backed by solid corporate fundamentals, including healthy balance sheets, stable debt levels and relatively limited default risk, in our view. This is especially important if the economy takes a downturn, which would tend to stress lower-quality bonds first.

The outlook for multi-asset income investors is much improved in 2023, and we think short-duration investment-grade credit plays a key part. We don’t expect a deep recession in the US, or interest rates to rise sharply from here. But if either scenario strikes, the high quality and relatively low interest-rate risk of short-duration investment-grade credit could cushion a diversified strategy against potential market instability—at least long enough for investors to adjust.