Investment-grade exposure should remain selective.
US Investment Grade Credit
US investment-grade credit has been downgraded to underweight. The issue is not quality, but compensation: spreads are near post-crisis tights, and the broad index now offers limited reward for the duration and credit risk being taken. Issuer leverage is rising and interest cover is thinning, which means the easy part of the credit trade has already passed.
What this means for portfolios: Investment-grade exposure should remain selective, with a preference for shorter-dated and floating-rate instruments rather than broad long-duration credit beta.
US High Yield Credit
High yield remains the clearest tension in the book. The technical signal is strong and the market is functioning, but spreads are near 20-year tights and do not offer enough compensation for deteriorating issuer health. Defaults remain low, but leverage is elevated and a growing share of issuers has limited interest cover.
What this means for portfolios: The portfolios remain underweight high yield, with any exposure focused up in quality rather than chasing the strongest near-term momentum.
Government Bonds: Preference for US Treasuries
US government bonds remain neutral, but the investment case is focused on carry rather than a strong duration opportunity. Inflation has re-accelerated, the Federal Reserve remains on hold, and government borrowing has become a binding constraint, particularly at the long end of the curve. The 30-year yield and term premium remain vulnerable to supply risk, while the belly of the curve still offers fair carry and diversification. International government bonds remain underweight, as lower core yields and tightening policy in Europe and Japan provide less compensation than US Treasuries.
What this means for portfolios: Portfolios retain US government bonds as a stabilising allocation but avoid extending too far into the long end where supply and inflation risk are most exposed.
Emerging Market Debt: Upgraded, but still currency dependent
Emerging market debt has been upgraded from underweight to neutral as oil pressure has eased and emerging-market currencies have steadied against a softer dollar. The opportunity is uneven, however. Local-currency debt offers genuinely high income but remains a currency trade, while hard-currency spreads are tight and provide little cushion against a growth or dollar shock.
What this means for portfolios: Exposure can move back to benchmark, but the position remains dependent on currency stability and should not be treated as a broad, low-risk income opportunity.
