Navigating tight credit spreads: can trigger strategies help?

Credit spreads – where are we now?

As of 31 July 2025, the yield of the iBoxx non-Gilt index was about 0.90% above the yield of government bonds, representing the spread, or potential annualised excess return for holding credit to maturity versus equivalent government bonds. 

Spreads are very tight compared to their average level over the past 20 years, having been below the 25th percentile (1.13%) for over 90 days. Excluding the most recent burst of volatility driven by ‘Liberation Day’, it’s closer to a year. Additionally, if you also exclude a short-lived spike around the time of the UK general election, it rises to about 500 days. This means investors have been less well compensated for the additional risk of holding corporate bonds, historically speaking, for a very long time. 

How long can spreads stay tight?

History suggests that credit spreads can stay tight for longer than one might expect – but not forever. In calm economic expansions, prolonged periods of tight levels can ensue. In reference to the highlighted periods on the charts:

1. During 2005–2007 (prior to the global financial crisis) accommodative monetary policy, strong corporate earnings, and abundant liquidity kept global investment grade spreads in a narrow, low range.
2. In 2020, aggressive central bank intervention and fiscal stimulus compressed spreads to post-COVID lows.
3. Most recently, a number of factors have kept credit spreads tight. These include but are not limited to robust corporate earnings, technological innovation (AI) boosting productivity, consumer confidence and the wealth effect.

These periods reminded investors that sitting out of the market, waiting for potential spread widening, can mean missing out on ‘carry’ i.e. the additional yield over government bonds. 

Regarding where to invest in the meantime, as we discussed in a previous blog, we believe that investment in short-duration bonds (which are less sensitive to spread-widening events) can provide a potential safe harbour, helping investors to capture carry in the near term.

Using a trigger mechanism: prepare, don’t predict!

In this context, we believe adopting a ‘prepare, don't predict’ investment strategy is particularly prudent. Predicting market movements can be fraught with uncertainty, but preparation can allow investors to build resilient portfolios that can weather various scenarios. Understanding that spreads tend to mean revert over time, investors can position themselves to seek to benefit from the eventual widening – for some investors, that means employing a trigger strategy.

A trigger strategy involves entering the market only when a defined spread level is reached. It has several potential benefits; a key one is that you’re prepared to act when the time is right. It also takes the emotion out of the decision as when a market dislocation event occurs, is precisely when it can be extremely uncomfortable to act. Think of COVID, the gilt crisis and the global financial crisis. You’re buying when others are selling. Going against the herd can be nerve racking, although potentially very rewarding. 

When following this approach, a lot of the work can be done ahead of time e.g. deciding on the trigger spread level and on how to invest when this is reached. This means that when an attractive spread levels is reached, the risk of missing the market opportunity can be reduced.

Over the past year, we have been discussing these strategies with pension schemes and insurance companies. Execution triggers that initiate trading are typically favoured by clients that prefer to minimise the chance of missing an attractive market. On the other hand, notification triggers that require further instruction before trading, tend to suit clients that expect to be able to digest the news and take an informed decision in good time, facilitated by an appropriate governance structure.

While credit spreads remain tight, we expect continued interest in these strategies.