IG Credit Strategist: Bullish on spreads

Research evidence excerpt

IG Credit Strategist: Bullish on spreads

Bullish on spreads

IG spreads stabilized over the prior two weeks near the YtD tights. We expect spreads to

continue grinding tighter in 2H-2026 to 65bps. That would be about 5 to 10bps inside

the prior tights set in 2021 (after adjusting for the structural changes, see Situation

Room: Structural spread tightening) and in January 2026. Several risks exist, but none

change the outlook for tight, range-bound spreads materially. Instead, we look for strong

technicals to continue supporting credit valuations for the remainder of the year.

Exhibit 3: We look for spreads to continue grinding tighter in 2H-2026 to 65bps

We look for IG spreads to remain tight and range bound in 2H-2026.

IG spread Year-end spread target = 65

Source: ICE Data Indices, LLC., BofA Global Research

BofA GLOBAL RESEARCH

Technicals are already strong

IG technicals are already strong, but they should get even stronger in the second half.

The big beat on the US Non-farm Payrolls in May (see US Watch: May jobs: World Cup

fever arrives early) has pushed Fed pricing in the more hawkish direction, with a hike

now fully priced in for December 2026. In addition, the lack of progress on Iran, while

negative for sentiment in the near term, should lead to higher oil prices, and hence

higher interest rates over the longer term (see Global Energy Weekly: Hormuz for

Hormuz opens new oil path).

The elevated yields have already attracted big inflows to high grade funds / ETFs in May

(Exhibit 6). Yields have also supported institutional demand. As a result, the performance

of IG new issue supply improved in May (Exhibit 4). The strong demand for bonds led to

the outperformance of cash bond IG spreads relative to CDS (Exhibit 5), as well as equity

implied volatility (Exhibit 7).