Quick takes on capital markets

20 May 2022

Credit markets: Feeling out the tremors

With economic growth concerns mounting, fixed income investors need to consider shifting from low to high quality credit. More attractive valuations and less upward pressure on bond yields should make this transition more appealing.

Bond yields
Yield to worst, 2002 - present

Bond yields to worst, 2002 to present
Source: Bloomberg, Principal Global Investors. Data as of May 19, 2022.

Q1 2022 delivered the worst core bond performance since 1980. That weakness has extended into Q2—the Bloomberg U.S. Aggregate Bond index has now erased all gains since mid-2019.

Investors shouldn’t be entirely surprised. Historically tight spreads, low yields and inevitable monetary tightening from the Federal Reserve created daunting prospects for U.S. investment grade (IG) at the start of 2022. However, recent sharp moves have shifted the asset class’s outlook.

  • Valuations have become considerably more attractive since January 2022. Now, with U.S. IG yields not far off 12-year highs, demand from yield-based buyers (pension funds, insurance companies, etc.) should accelerate. In comparison, the yields on high yield bonds are still meaningfully below 2020 levels.
  • A repeat of the recent bond market rout is unlikely. With U.S. headline inflation peaking, market expectations for Fed tightening shouldn’t ratchet up significantly, and thus duration concerns have likely peaked.
  • Economic growth worries are mounting. The higher quality of IG credit, alongside U.S. Treasurys, can add an element of defensive positioning in portfolios, providing stronger downside mitigation.

Credit markets haven’t been immune to market turmoil and will be further challenged as economic growth slows. With difficult days ahead, preparing fixed income portfolios with longer duration and higher quality exposures is advisable—at least now there’s some yield to go along with it.

Recalibrating Risk: Actionable insights to power portfolios


Wall Street Journal Custom Content is a unit of The Wall Street Journal advertising department. The Wall Street Journal news organization was not involved in the creation of this content.

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results and should not be relied upon to make an investment decision. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

For Public Distribution in the United States. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Principal®, Principal Financial Group®, and Principal and the logomark design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and services marks of Principal Financial Services, Inc., in various countries around the world.

Principal Global Investors leads global asset management at Principal.®