The recent tariff shock has put many fixed income investors on edge. Bread & butter Treasury bonds have only increased in their volatility in recent weeks as investors seek to deal with the new reality of economic and overall uncertainty. To that end, finding an edge or calm port in the storm is now paramount. And investors may very well find that port on the other side of the investment-grade sea.
We’re talking about corporate bonds.
Investment-grade corporate bonds have held up pretty well in the recent stormy tariff seas and could represent a compelling play for the rest of the year. Offering strong credit quality, strong yields, and robust fundamentals, investment-grade corporates could be a top-notch choice for fixed income investors in the weeks ahead.
The Other Half of the Agg
By and large, bond investors are a conservative lot. They like the steady coupon payments and the return of their principal at maturity time. And with that in mind, Treasury bonds have long formed the backbone of many bond portfolios. However, these days, the safety of Treasury bonds has been tested. Yields on the benchmark 10-year have moved about a full basis point—up and down—in a matter of a few trading sessions as Trump’s tariff announcements, pause, doubling down, and pause again have taken hold. Those yield movements are a direct result of investors selling and buying, causing underlying bond prices to move.
In the days since, many pundits, analyses, and think-pieces have called into question the safety and security of Treasury bonds. For fixed income investors, this is a huge issue. Where can they get the safety and income they desire? The answer for solace may come in the other half of the investment-grade world: corporate bonds.
High Yields, Strong Credit Quality, and Government Immunity
Bonds issued by firms such as Coca-Cola, Microsoft, and Walmart may offer the chance for investors to have their cake and eat it too. That is because they feature a variety of factors and current fundamentals that make them great choices in the current fixed income malaise.
For starters, their higher current yields are a major win for investors.
Because Coca-Cola does not have the ability to print money or raise taxes to pay its debts like the U.S. government, there is some enhanced default risk with corporate bonds. That is why they have higher yields than Treasury bonds. And right now, those yields remain juicy. According to Allianz, investment-grade corporate bond yields remain above 5%. That is a full 140 basis points above their 10-year average. 1
This chart from the investment manager and insurance giant shows that despite recent declines in yields, investment-grade corporate bonds are still offering very high-income potential for investors.
Source: Allianz
However, those higher yields are not all that justified, particularly in the current environment and worries about government debt positions. That’s because fundamentals in the corporate world remain robust.
In the years since COVID, corporate fundamentals have been very strong. Thanks to the period of growth, many firms have built substantial cash reserves and locked in low, long-term financing expenses during the period of low interest rates. This has provided a long runway and big buffer for rising uncertainty and potential slower growth. Shareholder reward activity has also decreased in recent quarters, with dividends and buyback growth last year coming in flat versus the previous year. That’s a net positive for creditors and bondholders. With that, upgrades of investment-grade corporate bonds surpassed downgrades by $496 billion in 2024. Meanwhile, fallen angel activity—or those investment-grade bonds that were downgraded to junk status—was modest and below historic norms.
The reality is that many investment-grade corporate issuers could be seen as ‘good as gold’, equally as strong as the U.S. government in terms of quality.
Then there is the economic environment to consider. It turns out corporate bonds could be very well suited for both recessionary and low-growth environments. This is due to their placement in the capital stack. Bonds sit above stocks in the bankruptcy ladder. Thanks to this factor, they aren’t as volatile as equities from the same firm. In recessions and low-growth economies, investors prefer to get the guaranteed 4% to 6% from a firm’s bond rather than take on the equity risk. The proof is in the data. Allianz’s research highlights that investment-grade bond returns have performed the best during periods of 1-3% economic growth on average, and not during periods of high economic growth as many investors expected.
Finally, the Fed may just be accommodative to corporate bonds. If the economy does go bad, the central bank will almost assuredly cut rates, potentially even aggressively. That’s a net positive for longer duration bonds and those with higher yields, such as corporate bonds, as investors look to lock in income before rates crater.
Time for Corporate Bonds
With some of the shine coming off Treasury bonds, investors looking for safety in their bond portfolios may want to turn toward investment-grade corporate bonds as a solution. They feature higher starting yields and very good fundamentals. While there is some risk of slowing growth due to tariffs, the last few years of growth have provided strong underlying fundamentals and balance sheet health for many firms. This should provide insulation to any immediate shocks.
Getting your hands on investment-grade corporate bonds is pretty easy. Any good brokerage account should be able to assist in trading and buying them. Bonds from many blue chips have a robust secondary market with low bid-ask spreads.
But like many sectors, the answer could be in buying a broad ETF that holds a diverse basket of corporate bonds. There are many active and passive choices in the asset class, offering exposure to a variety of durations and risk profiles.
Investment-Grade Corporate Bond ETFs
These funds were selected based on their exposure to investment-grade bonds at a low cost and are sorted by YTD total return, which ranges from -2.2% to 1.3%. They have expenses of 0.03% to 0.36% and yields from 4.4% to 5.9%. They have assets under management between $393M and $31B.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| IGSB | iShares 1-5 Year Investment Grade Corporate Bond ETF | $21.7B | 1.3% | 4.4% | 0.04% | ETF | No |
| NEAR | BlackRock Short Duration Bond ETF | $3.18B | 1.3% | 4.6% | 0.25% | ETF | Yes |
| IGIB | iShares 5-10 Year Investment Grade Corporate Bond ETF | $15.3B | 0.8% | 4.6% | 0.04% | ETF | No |
| CORP | PIMCO Investment Grade Corporate Bond Index ETF | $1.33B | 0.7% | 5.2% | 0.36% | ETF | Yes |
| KORP | American Century Diversified Corporate Bond ETF | $393M | 0.2% | 5.0% | 0.29% | ETF | Yes |
| SPBO | SPDR Portfolio Corporate Bond ETF | $1.83B | -0.1% | 5.2% | 0.03% | ETF | No |
| LQD | iShares iBoxx $ Investment Grade Corporate Bond ETF | $30.4B | -0.3% | 4.7% | 0.14% | ETF | No |
| VCLT | Vanguard Long-Term Corporate Bond ETF | $15.5B | -2.2% | 5.9% | 0.03% | ETF | No |
Overall, investors looking for safety in their portfolios may want to run toward the world of investment-grade corporate bonds. Their strong credit quality, robust fundamentals, and high starting yields offer a real port in the current fixed income storm. And with history on their side in terms of returns in low-growth environments, they could be the best bet in the bond world today.
The Bottom Line
Volatility in the Treasury market could make investment-grade corporate bonds a great option for investors. Offering higher yields and still great credit quality, these bonds could prove to be a real winner as the economic environment lessens and worries grow.
1 Allianz (March 2025). US investment grade bonds: a promising outlook
