CIO Commentary: The 7% Solution

Investment grade bonds can offer pension-style 7% returns as heavy 2027 issuance keeps yields and spreads attractive.

• About half of the investment grade bond market yields above 6%, while $330 billion by market value yields above 7%; more than $3 trillion trades above 6%.
• The high-yield market yielded 3.53% at its July 2021 trough, whereas investment grade corporate bonds now offer a yield advantage over the S&P 500 earnings yield last seen in June 2002.
• Another 100 basis points may be available through investment grade private placements, according to the commentary.
• Markets price two to three additional rate hikes over the next 12 months, while hyperscalers are forecast to spend $1.4 trillion on capital expenditure and the U.S. Treasury is estimated to issue $2.1 trillion of net new debt in 2027.
• AI-related sectors and banks face wider spreads as they prepare to issue heavily, while $40 billion of high-yield bonds matures this quarter and $253 billion matures in 2027.

Takeaway: The author argues that investors can target a 7% return through investment grade markets without taking the credit risk previously required, although refinancing pressure will expose weaker borrowers as rates remain high.