Investment grade prospects for the 2024 outlook

Introduction

The investment-grade market closed on an encouraging note in 2023 despite considerable volatility in interest rates and spreads, but ongoing uncertainty surrounding factors such as the Federal Reserve’s (Fed's) next actions, inflation, and growth makes 2024 a complex landscape to navigate. Franklin Templeton's Investment Grade team discusses their 2024 outlook, highlighting opportunities, areas of risk, and surprises within the investment grade space for the coming year.

Summary

In 2024, the US Investment Grade Credit team estimates the asset class may generate total return between 4%–5%, reflective of current yield levels and limited potential for any further spread tightening given current valuations. The team does identify structural opportunities that exist across long-duration high-quality, intermediate mid-beta, and short-duration higher-beta risk.

Several potential headwinds may challenge the asset class in 2024, notably a potential slowdown in consumer spending contributing to a slower growth environment, as well as an increase in new issue supply. These risks may impact specific sectors of the economy differently and may result in greater spread dispersion across sectors and companies.

Surprises that could impact the investment-grade markets in 2024 include scenarios where lower interest rates trigger a wave of debt-funded mergers and acquisitions or share buybacks. Inversely, an unexpected increase in interest rates, contrary to consensus forecasts for lower yields, along with heightened geopolitical risks could result in further volatility. With corporate credit spreads trading below historical averages at levels that seem to have a “goldilocks” soft-landing scenario priced in, this infers limited capacity for the market to absorb potential surprises.

For more insight, watch the video featuring Franklin Templeton Fixed Income’s Josh Lohmeier, George Bailey, and Mike Cho, who discuss the Investment Grade team’s 2024 outlook.