1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 118
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Investment grade corporate credit yields are above their long-term average
7%
6%
5%
4%
3%
2%
1%
0%
2010
2012
2014
2016
2018
U.S. investment-grade yield to worst
2020
2022
2024
Historical avg
Source: Bloomberg Finance LP, Scotia Wealth Management
The additional yield offered by high yield debt over investment grade has diminished since
the pandemic
7%
6%
5%
4%
3%
2%
1%
0%
2010
2012
2014
2016
2018
2020
Yield to worst (High yield - investment grade)
2022
2024
Historical avg
Source: Bloomberg Finance LP, Scotia Wealth Management
Earnings yield spread has narrowed against sovereign bond yields
We also emphasize fixed income’s role by examining the relative valuation between equities and
bonds. The spread between the S&P 500 earnings yield and the 10-year U.S. Treasury yield is
currently below its long-term average and sits nearly 1 standard deviation below its historical
mean. From this perspective, sovereign debt looks increasingly attractive as a portfolio stabilizer,
particularly if equity multiples face pressure or macro uncertainty resurfaces. While bonds may
not deliver outsized returns, their ability to offset equity volatility and preserve capital becomes
more valuable when equity upside is increasingly conditional.
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