Fixed Income: finding income in the crossover credit 'sweet spot'

In fixed income, investors are used to making trade-offs. Higher yield usually means higher volatility, weaker balance sheets and a greater chance of default. Lower-risk bonds, meanwhile, often come with modest income - especially in periods of economic uncertainty.

But the picture is more nuanced as the relationship between credit ratings and risk isn’t a simple one. Instead, there's a distinct part of the market where the income boost is meaningful, yet the additional risk is far more modest than many assume. That area is ‘crossover credit’- the space where the lowest tier of investment grade (BBB) debt meets the highest tier of high yield (BB).

It’s a corner of fixed income that has quietly delivered some of the strongest risk-adjusted returns over the past quarter century. A balanced mix of BBB and BB bonds has historically produced returns close to broader high yield, but with volatility and long-term default behaviour much closer to investment grade.

In today’s uncertain environment - with investors looking for clarity on rate cuts, geopolitical surprises and fragile sentiment - that combination of income and resilience is particularly attractive.

Understanding the ‘sweet spot’

Crossover credit sits at a fascinating junction in global bond markets. As credit ratings decline, yields do rise — but the increase in risk is far from linear.

Defaults and severe drawdowns are typically concentrated among lower-quality single-B and CCC issuers. BBB and BB companies, by contrast, tend to be larger, more established and better capitalised. They also have superior access to funding and a proven ability to manage their businesses through economic cycles.

That’s why stepping from A-rated bonds into BBB often delivers a noticeable income lift with only a small rise in underlying risk. Moving from BBB into BB enhances yield again - but still avoids the steep jump in default risk that appears further down the quality spectrum (see Chart 1).

In other words, investors can capture a substantial slice of additional yield before they reach the risk-heavy end of high-yield credit.

A broad and expanding opportunity set

One of the least appreciated features of this crossover segment is its scale. Over the past two decades, the BBB and BB universes have grown markedly as companies have matured, deleveraged or migrated between rating buckets (see Chart 2).

Today, this area of the market encompasses more than 2,300 issuers across the US, Europe, Asia and emerging markets. That’s a deep and diverse hunting ground for income-focused investors.

Importantly, the universe also includes specialised instruments such as subordinated financial bonds and corporate hybrids. These structures can offer compelling yield opportunities at different points of the economic cycle.

For active managers, this breadth supports consistent opportunities to identify mispriced bonds, capture relative-value dislocations, and position for rating changes.

Rising stars, fallen angels - and why they matter

Two types of issuers play a key role in the outperformance of the crossover category.

Fallen angels - companies downgraded from investment grade into BB - often face forced selling by investors restricted to investment grade. This mechanical pressure can push prices down more than fundamentals justify. For patient investors, that can create attractive entry points. In addition, many issuers act quickly to regain investment grade status - through cost discipline, asset sales or refinancing - which can further support a bond’s recovery.

Rising stars travel the other way: they start life in high yield but move toward investment grade as their balance sheets and business performance strengthen. These bonds often reprice positively as upgrades approach, rewarding investors who can spot the transition early.

Together, fallen angels and rising stars reinforce a key advantage of the crossover segment: long-term structural inefficiencies that routinely create opportunity for active credit research.

Why crossover credit stands out today

Periods of market anxiety have historically highlighted the value of resilient income. Today is no different. With central banks balancing inflation risks against softer growth signals, investors are again reassessing where to find stable return streams without taking excessive risk.

Crossover credit stands out for three reasons:

Final thoughts

The BBB-BB crossover area may not grab headlines, but its long history of strong risk-adjusted returns - and the structural dynamics that support it- make it an important part of the global fixed income landscape.

For investors navigating today’s evolving economic and political backdrop, crossover credit offers a rare combination: higher income, lower default risk than much of high yield, and a deep universe that rewards careful security selection.