Payden & Rygel: Now is the time to consider US IG bonds

August 5, 2025

There’s a good reason we haven’t seen many defaults. During the pandemic companies were able to borrow at extremely cheap levels given interest rates near zero percent, which enabled them to solidify their balance sheets. Plus, when there were concerns that we may see a recession in 2023, companies prepared for this by pausing on hiring or reducing capital expenditures. As a result even when the economy has hit a few hiccups along the way, there have been very few defaults.

Stretching to boost total returns

I think we are seeing people stretch in terms of trying to boost their total returns. For instance, investors who maybe traditionally only bought A-rated bonds are starting to dip down into BBB corporates. And investment-grade managers, may start going down the capital structure and adding high-yield corporate bonds to boost return potential. There are still a lot of attractive BB corporates out there which offer compelling yields around 6% to 7% range. High yield bonds have a great 2025 so far as well and have posted returns close to 5% in the first 7 months of the year. But there are still opportunities out there and we aren’t overly concerned about an oncoming default cycle.

Rate cuts

I think any rate cuts would be great for corporates. We’re expecting three this year here at Payden. And that could increase the returns on bonds if we see interest rates fall, plus that would also mean lower borrowing costs for companies issuing debt. We think getting one rate cut in September would be a great start, but even if they don’t come till later in the year, it continues to be a good environment for bond investors. Average corporate yields are currently above 5%, which we view as an attractive entry point. This view is supported by the high level of inflows we’ve seen into investment-grade credit so far this year and we expect this to continue to be a positive technical for the market.

Our interest rate forecast is not premised on the view that the economy is going to falter, since we still think it could be a decent year for growth. But our main basis for that view is that we think inflation has been moderating, and we’ve been seeing that in the recent data, and the Fed says they’re still in restrictive territory. So if inflation is not really a big concern, there is no reason for the Fed to be holding back on bringing rates back to a more neutral level rather than leaving them here at restrictive level.

Timing does matter. We’re really in the camp that we think the Fed should be doing one in September just because we have had that supporting data. Now everybody’s always data dependent and we don’t know what’s going to happen in the future, and there’s a concern that the impact of tariffs hasn’t really hit the inflation numbers yet. But we think we’re well positioned to get ahead of maybe a rise in unemployment. We are seeing some softening in the economic data in terms of employment, even though the unemployment rate really hasn’t jumped up that much, but we think the Fed should be getting ahead of that rather than waiting too long.

Longer Duration

We’ve been seeing a lot of interest in longer duration bonds, so those bonds with 30-year maturities, just because if the Fed were to engage on a rate cutting cycle, those longer duration bonds are going to benefit the most from a price and total return perspective. So, demand for 30-year corporates is off the charts.

But on the flip side, corporations haven’t been wanting to issue as many 30-year bonds just because there’s a steeper yield curve now and it costs them more to lock in yields at 5.5% to 6% on these long duration bonds. So, there’s a little mismatch of supply and demand there, but we think the long end of the curve is very attractive before we head into this interest rate cutting cycle.

In the front end, there’s still about $8 trillion sitting in money market funds, and there’s also the potential for that to move more into corporate bonds or even equities. And that’s why I think this is a strong supportive technical environment for both fixed income and equity markets in general as there’s just so much cash still waiting to be put to work.

The announcements of tariffs post Liberation Day really did hit the markets in terms of their spread performance immediately, meaning the price you had to pay for corporates over treasuries rose to about 120 basis points up from 80 basis points. But the market has since recovered all of that spread widening. So corporations are kind of in the same place they were pre–Liberation Day. And even though this could impact gross margins, we haven’t been seeing the impact too much in terms of earnings announcements yet, and we think any of that could be manageable for corporations.

Looking a little bit further down the road, we do think this could increase capital expenditure investments. Every day we seem to be getting new announcements about companies committing to building more plants in the US, so that could lead to an issuance boom down the road. I’d say there’s plenty of investor appetite to take down this issuance. So I think that could be a benefit for corporate America as well as investors.

Conclusion

I think for a lot of investment grade issuers, the public corporate bond market is the most efficient place to get their capital because investors are literally competing with one another to lend these companies money. It’s a very efficient market. Year-to-date we have seen $1 trillion in investment grade corporate new issue supply, which is up about 4% compared to last year. Corporations tend to have a regular issuance schedule and are not overly deterred by higher rates, so we think there still will be plenty of opportunities to add corporate exposure in the back half of this year.