@M&G Investments.
Insurers face a challenging credit landscape, with spreads near historic tights and limited dispersion. As uncertainty persists, strategies focused on credit quality, liquidity, and spread duration are gaining traction. Evolving regulations and underutilised asset classes, like high-quality structured credit, offer new opportunities to strengthen portfolios and enhance long-term resilience.
Credit remains central to insurers’ portfolios, but navigating today’s environment requires a more agile approach. With spreads tightening and macroeconomic uncertainty persisting, insurers are reassessing how to safeguard balance sheets while sustaining yield. Market conditions are prompting a closer look at public spreads, portfolio positioning, and the practical use of key asset classes.
Credit spreads have remained at the tighter end of the 10-year range since the start of the year, despite some spread widening following President Trump’s announcement of import duties on “Liberation Day” in April. Additionally, spread dispersion within notching buckets remain tightly clustered together, thus limiting the opportunities to select winners within each bucket.
This market environment proves challenging for large credit investors, such as insurers, who need to generate yield but are cautious of taking on risk that they don’t feel adequately compensated for.
We see three key strategies insurers can take in their credit portfolios in the current market:
• Firstly, prioritise credit quality to limit the impact from spread widening.
• Secondly, keep some powder dry to take advantage of credit markets when spreads widen.
• Thirdly, actively manage spread duration (whilst maintaining overall duration through derivatives if necessary).
Whilst these strategies may sound simple, insurers can face difficulties in the implementation of an approach change.
