US investment grade credit in 2026: elevated yields still doing the heavy lifting

US investment grade credit delivered solid absolute returns in 2025, even as spreads remained near multidecade tights for much of the year.

Markets proved resilient through tariff uncertainty, geopolitical noise and episodic volatility, with strong technicals and stable fundamentals allowing spreads to remain compressed. While valuations were not compelling on a relative basis, elevated all-in yields once again did the heavy lifting for returns, reinforcing the importance of income as the dominant driver of investment grade performance.

As we look ahead to the rest of 2026, we see that fundamentals remain solid, with stable leverage, strong interest coverage and a continued bias toward positive ratings migration. Higher gross and net issuance may temper spread performance but should also create opportunities for active security selection – though elevated policy and political risks warrant close monitoring.

In 2025, financial markets remained resilient despite challenges such as tariff uncertainty, geopolitical tensions and a prolonged US government shutdown (Exhibit 1). Markets experienced volatility after the announcement of reciprocal tariffs in early April but quickly recovered as trade fears eased and economic data improved.

Later in the year, political gridlock and high-profile bankruptcies caused renewed market jitters, including concerns about an AI-driven valuation bubble and tech sector debt. Yet despite periodic volatility, supportive economic conditions boosted fixed income returns, with both rates and spreads ending the year lower. Corporate credit remained solid, underpinned by steady growth and strong fundamentals, while worries about restrictive policy from the US Federal Reserve diminished.

Looking specifically at US investment grade credit, aside from the brief spike in volatility around “Liberation Day” in April 2025, spreads were largely insulated from the broader macro noise. After widening to 119 basis points in April, the easing of trade jitters and strong technicals drove spreads tighter; they reached a multi-decade low of 72 basis points in September before ending the year at 78 basis points.

Performance varied across subsectors. Financials benefited from solid balance sheets and limited new supply, outperforming both industrials and utilities, which were hindered by thematic factors, including a sharp increase in AI-related issuance. Several large tech companies, largely absent from the primary market in recent years, returned in strong fashion during the fourth quarter with multiple jumbo-sized transactions, putting pressure on spreads in the tech space. Elevated supply also weighed on the long end of the curve, contributing to underperformance as surging issuance steepened the 10-year to 30-year curve. In contrast, the intermediate segment of the curve delivered the strongest performance, while returns across rating buckets were relatively consistent between single-A and BBB issuers (Exhibit 2).

Looking ahead to the rest of 2026, we expect that AI spending will continue to support economic activity. As companies build out their data centre infrastructure, debt markets are expected to remain a key funding channel for future projects, with the investment grade bond market expected to do much of the heavy lifting in the near term (Exhibit 3). We think 2026 will see a further pickup in issuance from hyperscalers, alongside other AI-focused tech companies. In addition, other industries involved in powering AI projects, such as utilities and energy, will likely experience higher capital expenditure.

The combination of diverging growth Higher issuance should also be supported by increased merger and acquisition (M&A) activity, which was subdued for much of last year but picked up in recent months. A more accommodating regulatory environment suggests further acceleration in M&A in the year ahead. As a result of these and other factors, we expect gross supply to reach a new record for the asset class in 2026 (Exhibit 4).

The projected increase in net issuance does imply a less favourable backdrop for spreads – particularly in the tech sector. When looking at historical parallels, periods of heavy capital expenditure have often coincided with wider spreads in the relevant sectors. That said, today’s large tech companies generally display strong credit profiles, supported by robust balance sheets and strong ratings. In addition, we believe demand will provide a positive counterbalance to higher supply totals, as yields enter the year at still-attractive levels.

We also expect demand to remain high. In 2025, flows from the retail segment surpassed the USD 350 billion mark for a second consecutive year. For domestic institutional and foreign buyers, US investment grade credit continues to offer elevated yields, particularly as the asset class has improved in ratings quality over the past few years (with a record-low cohort of issuers rated BBB-, the lowest tier of investment grade quality). A steeper US Treasury curve provides an additional tailwind, historically coinciding with improved credit demand while also easing currency-hedging costs for overseas investors, which are expected to be increased buyers in 2026. Against this backdrop, we believe demand should remain both resilient and well balanced, helping support spreads despite a heavier expected issuance calendar.

Taking these issues into account, we believe that attractive total returns may still be achieved even in the face of spread-widening events. The year 2025 was a good example, with the Bloomberg US Corporate Index producing total returns of 7.77% (source: Bloomberg, as at 31 December 2025). This came despite spreads trading in a narrow range for most of the year (apart from the brief Liberation Day selloff).

In addition to attractive current yield levels, there are other factors setting up investment grade credit for good performance – for example, duration and spread duration. With the rise in yields since 2022, investment grade has seen both its duration (sensitivity to changes in interest rates) and spread duration (sensitivity to changes in spreads) decline by over one year. Combine these factors with elevated all-in yields, and we believe the asset class has the potential to deliver good returns over the long term without meaningfully stretching credit risk.

Other factors supporting positive return potential include the solid corporate fundamental backdrop, which is underpinned by positive economic growth and the improved credit quality of the market. Supply has been led by the financials sector early in the year, which means most of it is focused on the 3-to-10-year segment of the credit curve. Once we begin seeing supply issued by industrials and utilities, that could lead to a steepening of the credit curve, creating opportunities in the long end.

For now, we maintain our preference for financial services businesses and utility companies over industrials, where mergers and acquisitions (M&A) and trade policy risks are more pronounced. The ongoing AI spending cycle should also generate opportunities to selectively add attractively priced new issues from hyperscalers and other technology issuers. Along the curve, we remain overweight the intermediate segment. While the 10-year to 30-year curve steepened in 2025, it remains historically tight, and we prefer to wait for more attractive levels before adding significant exposure. From a ratings standpoint, we maintain a modest preference for bonds rated BBB, and we continue to hold some cash to capitalise on potential bouts of spread volatility.

In the current environment, we maintain a positive positioning on US investment grade corporate bonds. The macro outlook remains supportive, as do credit fundamentals for issuers. While current spreads are tight and downside risks certainly exist, still-elevated starting yields provide protection in the event of increased volatility. Most credit metrics continue to convey healthy trends, as evidenced by stable leverage and interest coverage ratios alongside limited dividend and share buyback activity. Meanwhile, earnings have surprised to the upside recently, with numbers coming in well above expectations.

Overall, we see many reasons to think that US investment grade credit will continue to provide strong returns in 2026 while offering opportunities for active managers to contribute to improved performance through active security selection.