In this month’s Bond Voyage, our solutions team explores the implications of a “higher for longer” US interest rate environment and what it could mean for investment grade (IG) investors.
Read this article to understand:
- Why the current US interest rate cycle resembles the one from the 1990s – and what that could mean for future rate movements
- What historical lessons might tell us about the future of IG corporate bond spreads
- The key implications for IG bond investors in today's environment
Will the US Federal Reserve (Fed) maintain its “higher for longer” stance on interest rates? This question has returned to the forefront of investors’ minds with renewed urgency.
Since late 2024, the Fed has kept rates steady, even as tariff-driven inflationary pressures have begun to filter through to the broader economy.
For IG bond investors, this macroeconomic backdrop raises important questions about credit spread behaviour, risk sentiment, and portfolio positioning.
Echoes of the past: 1994 and 2022
We don’t have to look far back to find a similar setup. In 2022 – much like in 1994 – the Fed responded to inflation with a rapid and aggressive hiking cycle. Rates rose by over 425 basis points in 2022, echoing the 250+ basis point hike in 1994 that peaked at 6 per cent in 1995. Fast forward to 2023, and rates again peaked at 5.5 per cent (see Figure 1).
Figure 1: Recent federal funds rates mirror the past (per cent)
Source: Aviva Investors, Bloomberg. Data as of July 16, 2025.
In both periods – 1994-2000 and 2022-2025 – the Fed front-loaded its hikes, then held rates steady for an extended period. In each case, it later delivered three mid-cycle cuts: in 1995-96 to support expansion after tightening, and in late 2024 to recalibrate policy amid persistent inflation and a resilient economy.
Despite these cuts, the Fed maintained a “higher for longer” stance, supported by strong domestic growth, tight labour markets, and booming asset prices – both eras driven by technological innovation. These parallels highlight the Fed’s consistent focus on long-term price stability over short-term market pressures.
What this means for IG credit spreads
With this backdrop, we examined how US IG corporate credit spreads behaved from 1997-2000. The data reveals a nuanced picture (see Figure 2):
- 1997 and 1999: Modest spread widening occurred in years marked by stable macro conditions and strong equity markets.
- 1998 and 2000: Spreads widened significantly, coinciding with the Asian financial crisis and the bursting of the tech bubble.
Figure 2: Do past corporate bond spread changes offer an insight for future? (basis points)
Past performance is not a reliable indicator of future performance.
Note: Data between December 31, 1996 to December 31, 2000.
Source: Aviva Investors, ICE BofA bond indices. Data as of July 30, 2025.
These episodes highlight a key insight: while IG spreads are generally resilient in stable environments, they remain vulnerable to systemic shocks and shifts in risk sentiment.
Today’s market: Calm, but not immune
As of mid-2025, IG spreads remain relatively contained. Several factors are supporting this stability:
- Strong demand from yield-seeking investors.
- Solid corporate fundamentals.
- A macro backdrop pointing to a slowdown, not a recession.
This environment resembles 1997 and 1999, suggesting only modest spread widening ahead. However, history reminds us that major shocks, like those in 1998 or 2000, can still trigger sharp repricing, even in otherwise stable cycles.
Implications for IG bond investors
1. Don’t chase yield blindly
While spreads remain tight, the risk of sudden widening due to external shocks is real. Investors should be cautious about reaching too far down the credit curve in search of yield, especially in sectors vulnerable to geopolitical or macro volatility.
2. Focus on fundamentals
In a “higher for longer” rate environment, corporate fundamentals matter more than ever. Balance sheet strength, cash flow stability, and sector resilience should be key filters in portfolio construction.
3. Watch for policy inflection points
The Fed’s mid-cycle cuts in 2024 were a recalibration, not a pivot. Investors should monitor inflation data, labour market trends, and asset price dynamics closely. Any signs of a shift in Fed tone could have outsized effects on spread behaviour.
4. Diversify across cycles
The historical spread behaviour between 1997-2000 shows that diversification across sectors and geographies can help mitigate the impact of systemic shocks. For example, spreads in transportations may behave differently than those in telecoms or utilities during periods of stress.
5. Prepare for event risk
Even in a benign macro environment, event-driven volatility – such as trade tensions, regulatory shifts, or geopolitical flare-ups – can disrupt spread stability. Investors should consider hedging strategies or liquidity buffers to manage tail risks.
Final thoughts
The “higher for longer” narrative is more than just a headline – it represents a structural shift with meaningful implications for IG bond investors. By learning from past cycles, focusing on fundamentals, and preparing for volatility, investors can navigate this plateaued rate environment with greater confidence.
We will continue to monitor developments closely and share our insights through future publications. Stay tuned.
