There are a number of tailwinds supporting the case for investment grade (IG) credit today. For one, yields in the U.S. remain compelling at 4.20%, which is 1.5 times higher than the 10-year average, while in Europe yields are at 3.2%.  At the same time, recent data suggests the U.S. economy looks more robust than markets were initially thinking—and, as a result, the pace of rate cuts from the U.S. Federal Reserve (Fed) may be slower going forward. In addition, technicals remain robust, while recent data suggests a stabilizing picture on corporate fundamentals. While risks remain on the horizon—including the shifting macroeconomic and political backdrop and heightened geopolitical concerns—this backdrop suggests IG credit is well-positioned going forward.

Supportive Fundamental & Technical Backdrop

From a fundamental standpoint, there have been signs of improvement across the market. In the U.S., revenue growth in the second quarter came through at 1.1%, while EBITDA was positive for the first time in five quarters at 1.1%. In particular, EBITDA ex-commodities rose by 7.1%, which is the fastest pace in two years.  Meanwhile, net leverage, while higher on an annual basis, remained flat from the previous quarter at 2.9x, and interest coverage declined by 1.5x but remained in line with long-term averages.

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