Investment Grade Bonds 2H26 Outlook: Slow, steady, and selective

• Investment-grade (IG) bonds remain attractive for steady carry, supported by all-in yields near recent highs.
• Credit fundamentals remain resilient, supported by earnings growth and favourable ratings migration.
• Technicals remain supportive, though heavy issuance makes demand increasingly price-sensitive.
• Asia IG offers diversification, but Global IG looks more attractive on relative valuations.
• IG bonds still play an important role within a diversified portfolio, providing carry and stability. Credit selection will be key to evaluate the risk-reward trade-off of each holding.

Recap of 1H26 performance

Bond markets generally delivered steady performances in 1H26, although investment-grade (IG) bonds lagged other fixed income segments with a -0.3% return in USD terms (Chart 1). By contrast, most other bond segments delivered flat to modestly positive returns, led by Asia high-yield (+2.9%) and EM hard currency (+2.4%) bonds.

We attribute IG’s weaker performance mainly to the rise in global benchmark rates (Chart 2), as investors began pricing in multiple Fed rate hikes amid US inflation of around 4%. Global IG tends to have a longer duration than other bond segments at the index level, which weighed on returns as rates rose. Meanwhile, spreads tightened across the board, though IG corporate spreads remained roughly around historical tights (Chart 3).

Carry was the primary driver for returns in 1H26, given the combination of elevated yields and broadly stable IG spreads. IG corporate bond yields remain near recent highs at around 4.7% (Chart 4), providing a strong baseline for total returns despite higher yields. Looking into 2H26, we expect carry to remain the main driver of IG bond returns and continue to recommend active credit selection amid tight spreads.

Chart 1: Steady performances across the board, though Global IG was a laggard

Chart 2: UST yields rose across the board, with short-medium tenor yields up the most

Chart 3: IG corporate bond spreads are near historical tights …

Chart 4: … but all-in yields are still decent

Credit fundamentals: Resilient, but dispersion is rising

Broadly, IG fundamentals remain stable despite an uncertain macroeconomic backdrop. In the US, the Fed projects a soft-landing environment, with 2.2% GDP growth and 4.3% unemployment by end-2026. Europe looks weaker, with the ECB projecting just 0.8% GDP growth in 2026, but this still falls short of a recessionary backdrop. Meanwhile, most other major economies are also expected to deliver positive growth in 2026 despite ongoing geopolitical risks.

Corporate earnings also remain resilient, supporting the current environment of tight spreads. In 1Q26, S&P 500 constituents delivered strong earnings growth of +29%, well above prior expectations of +11%. S&P 500 Financials and Banks also saw robust earnings growth of around +24% and +19%, respectively, beating consensus expectations. Looking ahead, consensus estimates still point to positive FY26 earnings growth of around +17% for the S&P 500 and +8% for S&P 500 Banks. Globally, earnings growth was more mixed but remained positive, with MSCI ACWI earnings rising +9% in 1Q26 and Financials up +11%.

(Note: The US accounts for >50% of the IG corporate bond universe, while banks account for ~25%. Major issuers include US banks like JPMorgan, Bank of America, and Morgan Stanley.)

Downgrade risks also look favourable so far this year. By 30 June 2026, US IG bonds had seen 155 credit upgrades versus 50 downgrades, implying an up/down ratio well above historical norms. In Europe and APAC, the up/down ratio has moderated slightly, but upgrades still outnumber downgrades (Chart 5). At the sector level, Financials – the largest sector in the index – continues to show favourable ratings momentum across geographies.

Upgrades also continue to outnumber downgrades across most major sectors, with Materials being the main exception. These reflect the solid fundamentals discussed above and suggest that most IG issuers should retain access to capital markets for refinancing. Taken together, the soft-landing backdrop, resilient earnings, and favourable ratings migration should keep defaults well-contained and limit downgrade risk in 2026. This should help reduce the risk of a sharp fundamentals-driven widening in IG spreads.

Chart 5: Upgrades still outnumber downgrades across key geographies, especially in the US

Technicals appear neutral, dependent on future supply absorption

Lower financing costs, helped by narrow IG spreads, have encouraged corporate issuers to issue more bonds in 1H26, extending the heavy issuance trend seen in 2025. Blockbuster issuances by large-cap tech names like SpaceX, Oracle, and NVIDIA ($25b each) likely pushed this number up compared to 1H25 issuances a year back*. For 1H26, we estimate USD IG issuances at around $1.4t, well above the run-rate of 2024 and 2025, which by themselves were already record issuance years (Chart 6).

(*Note: Large issuances by tech names only started to pick up around 2H25 [rather than 1H25].)

Despite the heavier supply backdrop, issuers’ maturity schedules remain manageable at the index level. IG maturities are well spread out, with no significant maturity wall in any specific year (Chart 7). Excluding calls, about $461b of IG bonds are scheduled to mature in 2H26, and about $1.0t to $1.4t per year from 2027 to 2030. If market conditions deteriorate and yields shift significantly higher, issuers without near-term maturities may opt to delay prefunding or discretionary issuances into 2027, helping to ease some supply pressure.

On the demand side, we still do not see signs of significant indigestion. The gap between initial and final price guidances has remained broadly stable (Chart 8). However, we note this is as overall spreads have tightened, meaning the same absolute tightening represents a higher proportion of the final guidance. Nonetheless, there appears to be ample demand for new issuances, with cover ratios holding up well (Chart 9).

Overall, we think market technicals look supportive for now. Incoming supply would be an important driver of spreads in 2H26, especially if large deals continue to come in (especially relating to AI spending). With that being said, we think the manageable maturity schedule ahead gives issuers some flexibility to adjust issuances if market conditions worsen.

Chart 6: 2026 is looking like another record year for issuances

Chart 7: Maturities are well spread out; no urgent refinancing needs

Chart 8: Gap between initial & final price guidances has remained stable

Chart 9: Demand has held up so far this year despite record issuances

The main reason to own IG bonds: High all-in yields and carry

The strongest argument for IG bonds lies in their high all-in yields relative to history. As shared in Chart 4 above, USD IG corporate yields of around 4.7% at the index level offer more compelling entry points for income-focused investors, especially compared to the lower-yield environment that dominated much of the 2010s.

This carry should be the main return engine in 2H26. With spreads already near historical tights, investors should expect most returns to come from income rather than capital gains. Current yields provide a buffer against moderate market fluctuations, including modestly higher Treasury yields and/or wider spreads. Historically, higher starting yields within this space have been correlated with stronger forward returns (Chart 10). With yields not expected to fall significantly across major markets in 2026, this should ultimately support income and total returns for bond investors.

The higher-quality nature of IG bonds also provides a buffer relative to higher-risk segments like high-yield (HY) bonds or equities. During market sell-offs, credit spreads typically widen, and investors face mark-to-market losses. IG bonds historically experienced much less spread widening (in absolute terms) versus HY bonds, resulting in more limited drawdowns (Chart 11). Coupled with the fact that the pickup for HY bonds over IG bonds is near historical lows (Chart 12), we think IG bonds can provide reasonable returns without requiring investors to take on high credit risks.

Chart 10: Higher yields are correlated with stronger forward returns

Chart 11: IG bonds are more resilient than HY bonds in periods of stress

Chart 12: Pickup for HY over IG bonds is also near historical lows

Global vs Asia IG: Opportunities in both, but mind the tight spreads

Investors often view the IG bond universe by geography. We think Asia IG can complement Global IG as a diversifier, especially for investors seeking a slightly shorter duration and/or a different issuer mix.

Underlying credit fundamentals remain resilient across the IG universe, be it in Global or Asia. However, Asia IG generally offers a shorter duration, alongside different issuer exposures. For instance, both segments have large exposures to Financials, but Global IG has more exposure to Consumer names, whereas Asia IG has more exposure to IT names. This means the two segments can play complementary roles within a diversified IG allocation.

The main caveat is that Asia IG (like Global IG) spreads are also tight. Yields are similar between Asia IG (4.8%) and Global IG (4.7%), but Asia IG spreads (56 bps) are tighter than those of Global IG (80 bps) on an absolute basis. Asia IG spreads also screen richer relative to their own 10-year history (-1.9 standard deviations below average) (Chart 13) compared to Global IG (-1.3 standard deviations). With Asia IG’s historical yield advantage also diminishing over time, relative valuations may favour Global IG at the index level.

Nonetheless, these reflect broader market trends and valuations and should not be interpreted as a reason to overlook Asia IG bonds entirely. We think Asia IG bonds ultimately work best as a diversifier with multiple opportunities for investors to pick from.

Chart 13: Asia IG bond spreads are trading even tighter than Global IG (-1.9 standard deviations)

Final thoughts and recommendations

To summarise, investment-grade bonds can still play an important role within a diversified portfolio, particularly for investors seeking carry and stability. Underlying fundamentals also remain resilient, while market technicals are supportive – these help IG bonds remain attractive for investors seeking lower-risk returns.

Our main recommendation is to carefully evaluate whether each bond or fund offers sufficient compensation for both credit and duration risk. On credit, we continue to find opportunities in both IG and selected HY bonds, though index-level valuations appear to favour IG given the low yield pickup from HY. On duration, we broadly prefer short to medium-tenor bonds or longer-term bonds given our interest rate view; that said, USD corporate curves are generally steeper than UST curves, potentially giving investors more pickup for taking on duration risks (Chart 14).

(Investors may wish to check out our recent articles discussing why we expect the global interest rate cycle to turn higher.)

Chart 14: Corporate curves are generally more upward sloping than US Treasuries

We provide a list of funds you can consider below (Table 1): all of these have average credit ratings within the investment-grade territory and can serve as a great starting point for any investor.

Table 1: Fund recommendations to consider

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.