Schroders upgrades global corporate bonds on easing U.S. recession risks

Schroders has upgraded its outlook on global corporate bonds to 'neutral' from 'negative', including U.S. investment grade and high yield bonds, citing reduced U.S. recession risks, stabilizing growth, and positive consumer sentiment. The asset manager maintained its positive view on global equities, including U.S. equities, believing downside risks are contained and recession risk is lower this year despite economic uncertainty. However, it noted high valuations for domestic corporate bonds and reiterated a negative outlook on the dollar.

Analysis

Asset manager Schroders has revised its outlook on global corporate bonds to 'neutral' from 'negative', signaling a significant reduction in perceived U.S. recession risk. This upgrade encompasses both U.S. investment grade and high-yield bonds and is underpinned by stabilizing economic growth, positive consumer sentiment, and a view that the market can now focus on constructive factors like deregulation and government spending. The sentiment shift is supported by market activity, with U.S. junk bond issuance reaching $28.9 billion in May, its highest level since September 2024, according to J.P. Morgan data. Despite this more favorable macro backdrop where the "biggest risks seem to have passed," Schroders cautions that overall valuations for domestic corporate bonds remain high. Concurrent with the bond market reassessment, the firm maintains its 'positive' stance on global and U.S. equities, believing downside risks are contained. Conversely, Schroders reiterated a 'negative' outlook on the U.S. dollar, suggesting a broad macro view that favors risk assets over the dollar as a safe haven.

Key Decisions for Investors

• Given the upgrade to 'neutral' on corporate credit, investors could consider reducing underweight positions in U.S. investment grade and high-yield bonds but should remain highly selective due to elevated valuations.
• Schroders' continued 'positive' outlook on global and U.S. equities supports maintaining or adding to long equity positions, capitalizing on the diminished near-term recession risk.
• The explicit 'negative' view on the U.S. dollar suggests that investors should review their currency exposure and consider hedging strategies or diversifying into non-USD denominated assets.
• Monitor corporate bond spreads and valuations closely, as high starting valuations could cap total returns and introduce price risk even if credit fundamentals are stable.