Higher-rated corporate debt might not be the best trade. Goldman weighs in on credit quality
Investors are reassessing positioning within corporate credit across the quality dimensions by using rating classifications as a proxy, amid higher real rates and an elevated AI-related supply, according to Goldman Sachs. “The catalyst has been the growing tension between solid fundamentals and challenging supply technicals within certain ‘high quality’ rating cohorts,” Goldman said in a note Thursday. While the highest rating categories in investment-grade (AA) and high-yield (BB) constitute the highest share of debt issuance historically, their longer duration profiles and thinner spreads also mean that their returns tend to be the most sensitive to higher interest rates, Goldman said. Goldman noted that lower-rated debt has been outperforming even as investors focus on quality, adding that BBB ratings have fared better than AAs and As on both a total and excess return basis across the U.S. dollar and euro markets. “We have favored BBBs in the USD IG [investment grade] market for a while,” it said. “We are now adopting a more aggressive stance toward moving down-in-quality within the EUR IG market as well, given our expectation for (higher-rated) AI-related supply to accelerate in the region,” the Wall Street bank said. Goldman is shifting its rating allocation preference to favor the lower-rated Bs from BBs, citing expectations of an ongoing supply headwind in the BB cohort. It has, however, shifted its stance on CCCs to underweight from neutral. “While the excess spread premium in this cohort is notable, it is a highly idiosyncratic group and warrants careful credit selection.”
