Payden & Rygel: Investment Grade Credit in 2026
A strong year for investment-grade credit has given way to a more nuanced outlook for 2026. While returns are expected to moderate, the asset class continues to offer compelling income and resilience in an uncertain macroeconomic environment.
Natalie Trevithick, Managing Director and Head of Investment Grade Corporates at Payden & Rygel, shares her perspective on where opportunities remain and why investors don’t need to wait on the sidelines.
Investment-grade credit had a terrific year in 2025. How are you thinking about 2026-continued strength or more caution?
At the start of 2026, we expected returns similar to last year, driven largely by income, with some incremental upside from potential Federal Reserve interest rate cuts.
That outlook has shifted somewhat. The first quarter was modestly negative, leaving us roughly flat year-to-date. As a result, assuming steady coupon income for the balance of the year, returns are now likely to come in somewhat below initial expectations, though still at levels we view as attractive.
There’s still a lot of uncertainty. Geopolitical developments, including the conflict in Iran, have added complexity, and we’re closely watching the implications for inflation, GDP, and Fed policy. While markets have rallied and spreads remain largely unchanged, it’s still too early to fully assess the longer-term impact.
Even so, we remain constructive on credit. Higher yields provide a cushion, and periods of modest volatility are likely to normalize over time.
There’s been commentary that bonds are behaving more like equities. Do you agree?
Not really. Investment grade credit has remained relatively stable compared to equities and continues to act as a relative safe haven.
Even during periods of volatility, demand has been exceptionally strong. We’re seeing record issuance, $465 billion in Q1, up 20% year-over-year and deals are often multiple times oversubscribed. Some of the largest transactions have seen enormous demand, reflecting the strength of the buyer base.
It’s also important to consider the quality of issuers today. Many large-cap companies, particularly in technology and related sectors, are generating significant free cash flow. This is very different from prior cycles, such as the late 1990s, when many companies lacked profitability. Balance sheets are strong, and many issuers are highly rated.
With record issuance, is there a risk the market becomes oversupplied?
That was a concern earlier in the year, but it hasn’t played out.
There’s still a significant amount of cash on the sidelines, and when markets become uncertain, investors tend to move toward higher-quality assets. At the same time, rising Treasury yields have increased all-in corporate yields, making investment-grade credit more attractive.
As a result, supply is being absorbed very easily. Despite elevated issuance, we’re not seeing meaningful spread widening. The market has handled the volume well.
Are developments in private credit having an impact on public investment-grade markets?
To some extent, yes. Certain segments, such as business development companies (BDCs), have come under pressure, and we’ve seen some spillover into sectors like banks and insurers that have exposure to private credit.
That said, these areas represent a relatively small portion of the broader market, and systemic risk appears limited. In many ways, the shift toward private credit reflects a broader evolution in how risk is distributed across the financial system.
If anything, recent developments highlight the value of liquidity. Public investment-grade markets offer daily liquidity, which is a key advantage compared to private credit, where redemption constraints can come into play.
Where are you finding the most attractive opportunities today?
We’re broadly constructive across sectors rather than focused on any single standout opportunity. We continue to favor:
- Global systemically important banks
- Utilities, particularly those tied to AI-related energy demand
- Select areas of the technology sector
At the same time, spreads are not especially cheap. This isn’t an environment where there are obvious “bargains.” Instead, the opportunity lies in building a well-diversified portfolio across A and BBB-rated credits.
At current levels, all-in yields of roughly 5% to 5.25%, offer a compelling source of income, which we view as an attractive risk-return profile within a broader portfolio.
How is investment-grade holding up relative to other fixed income sectors?
It’s holding up well, particularly on a risk-adjusted basis.
More broadly, fixed-income markets have remained orderly. The volatility we’ve seen has largely been driven by interest rate movements rather than credit fundamentals. Treasury yields have moved up and down, which has driven day-to-day price fluctuations, but credit spreads themselves have been relatively stable.
With so much macroeconomic uncertainty, how are you thinking about portfolio positioning?
We’re absolutely paying attention to the macro environment, but we’re not reacting to every headline.
Our approach is to focus on the longer-term fundamentals and assess how evolving conditions affect the broader economic outlook. We’re watching employment data, earnings trends, and overall economic resilience.
We’re not making large, frequent shifts in response to short-term developments. Instead, we’re taking a measured approach and adjusting portfolios as our views evolve over time.
Is now a good entry point for investment grade, or should investors wait for Fed moves?
There’s no reason to wait for the Fed. Markets tend to move ahead of policy, and current yields are already attractive. Even if the Fed doesn’t cut rates this year, investors can still benefit from the income component.
At current yield levels, this represents a compelling entry point. Investors can take advantage of steady income and avoid trying to time the market.
How active are you in managing portfolios in this environment?
We’re very much an active manager. Portfolio turnover is typically around 50%, which reflects the opportunities available in today’s market.
With approximately $2 trillion in annual issuance and a market approaching $10 trillion, there is a significant opportunity set. Active management allows us to capture new issue concessions, adjust duration and sector positioning, and identify relative value opportunities.
Where are the key risks or “landmines” investors should be aware of?
Risk tends to be more issuer-specific than sector-wide. In many cases, it comes down to management decisions or company-specific developments rather than broad industry trends. That’s why credit research is so important.
There are always pockets of risk in the market, and we expect dispersion between outperformers and underperformers to increase over time. Avoiding those weaker credits is critical.
What role should investment-grade credit play in portfolios today?
Investment-grade credit remains a core allocation. It offers attractive income, relative stability, and diversification alongside equities and other asset classes. While there will always be periods of volatility, they tend to be short-lived.
The key is to stay focused on the long-term opportunity and not overreact to short-term market noise.