Andrzej Skiba, Head of BlueBay U.S. Fixed Income, and members of his investment team deliver level-setting market commentary and forward-looking insights into what's driving fixed income markets in this weekly series.
Why credit investors are hedging – even as bonds rally
Neil Sun, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how portfolio managers are hedging their credit exposure despite a compelling market environment.
Key points:
- Investment-grade bonds are performing well: Yields remain attractive, and inflows are strong, despite tight spreads.
- Portfolio managers remain cautious: Despite strong performance, they are staying long on credit bonds while adding hedges to manage risks.
- Investors aren’t complacent: In this environment, how you manage risk matters just as much as how you find yield.
- Key takeaway: Hedging allows investors to stay invested while mitigating downside risks, ensuring portfolios remain resilient regardless of future market conditions.
Close the transcript
Read the transcript
Welcome to The Weekly Fix. My name is Neil Sun.
Investment grade bonds are having a solid year. Yields are still attractive, credit spreads are tight, but flows are coming in strong. Sounds great, right? But here’s what most headlines don’t tell you: many portfolio managers are still nervous. And instead of pulling back, they are staying long credit bonds and adding hedges behind the scenes. Let’s talk about why that’s happening, and what it means for your portfolio.
Right now, spreads on high-quality corporate bonds are near the lowest levels this year. Normally, that would signal rich valuations and limited upside. But instead of selling, managers are holding onto their credit exposure – because all-in yields still look compelling and there are still pockets of opportunity to generate alpha. However, there’s still a lot of macro noise: sticky inflation, geopolitical flare-ups, and the ever-changing outlook for the Fed. So investors are asking: how can I stay invested, but protected against the downside?
That’s where credit hedging comes in. Think of it as insurance where you spend a little premium to get protection. In portfolios, this allows you to keep high conviction bonds but hedge the tail risks. Here are some ways investment managers are doing it:
One approach is through index overlays – using tools like index credit default swaps such as CDX IG or HY to hedge broad credit exposure without selling a single bond. Other strategies involve using options on credit indices or credit ETFs to reduce beta in volatile times. This is not about running scared. It’s about being surgical – riding the carry but protecting the downside.
So, what does this mean for investors and advisors? It means portfolio managers aren’t complacent – even in a good year for credit. They are not going to cash, but they are not flying blind either. If you are allocating to core bond strategies or credit-heavy strategies, it’s worth asking: Are they proactively managing credit risk exposure with hedges or just riding the waves? Because in this environment, how you manage risk matters just as much as how you find yield.
Credit markets have been resilient, but caution hasn’t gone away. Hedging allows investors to stay invested while managing the risks that still linger beneath the surface. This isn’t about calling the next big move. It’s about building portfolios that can hold up through whatever comes next. And sometimes a simple hedge can make a big difference.
Thank you again for watching.
Sign up to get The Weekly Fix delivered directly to your inbox
Subscribed, thank you!
You will get notifications straight to your inbox when new publications are released. Meanwhile, explore latest GAM insights.
An error occurred
Something went wrong with your submission. Please reload the page, and try again.
