Sharp losses in investment grade (IG) corporate bonds this month have reminded us of the potential advantages of rules-based fixed income ladders. Rising IG yields may offer the opportunity to invest ladder maturities at higher yields—helping to improve the overall yield and cash flow of the corporate bond portfolio.
Over the past few weeks, uncertainty surrounding tariff policy has muddled the economic outlook and disrupted financial markets., IG corporate bond spreads have widened and in contrast to most risk off periods, interest rates have risen. Through April 22, the ICE BofA 1–10 Year US Corporate Index has produced a month-to-date total return of 0.7%—reducing the one-year trailing return to 7.11% and the year-to-date return to 1.59%.
Let’s review how an agnostic rules-based ladder could provide a hedge against uncertainty and how maturities reinvested at higher rates have the potential to benefit the portfolio. Then we can discuss the importance of credit research and the outlook for the corporate bond market.
How do rules-based ladders work?
A ladder structure seeks to provide predictable income and reduce interest rate and reinvestment risk, while also helping to manage credit risk by aiming to ensure proper sector and issuer diversification. An equal percentage of the ladder matures in each period and the proceeds are reinvested into the longest available maturity rung.
- A rules-based ladder systematically reinvests maturities as they occur, no matter the market environment.
- Since the ladder is rules-based, re-investment is agnostic and made without regard to the emotional state of the investor.
Typically, reinvesting into longer maturities results in the ladder’s distribution rate trending higher over time. While periods of rising rates and widening spreads can be painful in the short term, reinvestment increases the all-in yield of the laddered portfolio, helping to potentially improve forward returns and cash flows.
Credit research structured to avoid idiosyncratic losses
A laddered IG corporate bond portfolio is constructed with the goal of maintaining principal while achieving predictable cash flow—even during periods of growing credit concerns.
Avoiding idiosyncratic loss is a key driver of an IG corporate bond portfolio’s total return and income. Idiosyncratic losses occur when a security defaults or when the ratings agencies downgrade a security from investment grade to high yield. A substantial part of our bottom-up fundamental research effort is structured specifically to avoid them. To that end, we believe a vast majority of index eligible issuers aren’t appropriate to be included in a principal protection account. The ICE 1–10 Year US Corporate Index has over 1,200 distinct issuers, while our approved list now numbers about 202 issuers.
In our view, the results speak for themselves. Since the height of the pandemic five years ago, 53 corporate bond issuers have fallen from investment grade to high yield. Through our research, Parametric's IG analyst team was able to identify them all as downgrade risks. We believe our approach has helped us to limit losses associated with these fallen angels and other credit events. Should the economic cycle deteriorate, defaults and downgrades are likely to increase, making credit research incrementally more important to fixed income investors.
IG corporate balance sheets in Q1
In our view, IG corporate balance sheets are solid. We think the recent widening in credit spreads can be attributed to broader risks rather than a deterioration in credit quality.
- IG issuers entered 2025 having locked in low-cost funding and lengthening maturities.
- Leverage metrics have been stable or improving, and interest coverage ratios have remained high.
- Q1 earnings reports have been supportive of ongoing free cash flow generation.
Generally, the IG universe has limited exposure to distressed issuers. Default activity has been almost entirely confined to the high yield space. Positive ratings momentum continued in Q1, with 2.3 issues being upgraded for every issue downgraded.
Fundamental outlook for IG credit
Spreads have widened modestly after spending an extended time near their historic lows. We assess the spread widening to this point as consistent with a slowing economy but not with a recession.
- Liquidity has remained strong in terms of both secondary trading and new issuance.
- The current maturity profile for IG corporates isn’t overwhelming, with most obligations maturing after 2026 and only modest refinancing needs in 2025.
Read our strategy overview to learn more about Parametric US Corporate Ladders.
The bottom line
Investment grade corporate ladders continue to offer a defensive way to potentially generate attractive income. Rising rates and wider spreads may enhance future cash flows and distributions. Corporate balance sheets are still strong and market liquidity is still solid. Starting yields near 5% could potentially provide a significant cushion against rising rates and widening spreads. For instance, a 1–5 year BBB ladder has a current starting yield of 4.87%. It would require a combination of rising rates and widening spreads of 300 basis points before the one-year return turned negative.
Parametric’s Laddered Interest Rate Scenario Tool helps investors explore the performance of corporate bond portfolios in changing rate environments.
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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
Read more about how Parametric’s credit research seeks to avoid fallen angels.
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