Taking credit for protection

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Articles by Alexander

Alexander Johnstone

Assistant Fund Manager

11 September 2025

The greatest challenge for an all-weather strategy is finding protection that is attractively priced and works when we need it. Investments that gain exposure to credit spreads can be a critical asset in the arsenal. They can also be a complement to equity market protections – a raincoat for when the wind blows your umbrella inside-out.

Corporate bonds attract investors by paying higher yields than government bonds. This risk premium compensates bondholders for taking on the greater risk that the company might default on payments. The difference in yield is known as the credit spread. Investors can get protection against this credit default risk via instruments known as credit default swaps.

The blue line on this month’s chart shows the spread on an index of credit default swaps on North American investment grade corporate bonds. It is charted against the S&P 500 index (on a log scale) in green. The shaded areas indicate periods when the stock market has experienced a significant correction. Since the global financial crisis, the spread has ranged from a low of 44 basis points (0.44 percentage points) to a high of 158 basis points.

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The chart illustrates how sensitive investment grade credit spreads are to movements in the S&P 500. That makes sense, because the 125 companies in the investment grade index are the highest quality issuers in North America, most of which are S&P 500 constituents. These firms are highly unlikely to default on their debt payments, but default is not required for spreads to blow out. Importantly, spreads tend to widen materially as the perception of market stress increases.

At the time of writing, the spread is around 50 basis points, towards the bottom of the range. In our view, this tightness does not reflect the significant risks to US credit. The labour market is slowing, tariffs are headwinds to growth, and considerable uncertainty persists around President Trump’s policies. Even as rates come down, the aggregate cost of borrowing will continue to rise as companies refinance pandemic-era debt issued at near zero interest rates.

However, investor demand for high grade corporate debt has been remarkably strong, compressing credit spreads. After the Federal Reserve hiked interest rates to counter the post-pandemic inflation surge, 2023 and 2024 witnessed significant inflows to corporate bonds as investors hunted for higher yields and the economy remained robust. Despite the tariff shock, net inflows have continued in 2025: the start of August saw the largest weekly flow into US exchange traded funds and mutual funds holding investment grade bonds since 2020.

Nevertheless, April’s market shock was a reminder of spreads’ sensitivity when the market begins to price in more systemic risks, such as recessions, rising defaults or liquidity strains. Investors with significant corporate bond exposure look to hedge their credit risk. Credit default swap indices, such as the one in the chart, offer a liquid and efficient hedging option, which should rise in value as bond values fall and credit spreads widen.

The experience of recent market dislocations shows there is no such thing as a free lunch for investors looking for portfolio protection. Traditional defensive assets – notably, US treasuries and the dollar – have been unreliable offsets at best. At worst – during the market spasm in early April, for example – they can compound the pain felt in conventionally risky assets such as equities. Gaining protection via exposure to credit spreads comes at a cost, but we believe it is a cost worth paying.

Articles by Alexander

Alexander Johnstone

Assistant Fund Manager

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Piers Wheeler

Director – Institutional

T +44 (0)20 7963 8258

Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

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Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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