Most UK investors predominantly invest in sterling rather than global investment grade (IG) credit, despite taking a much more global approach with their equity investments.
But we think it makes sense for many investors to diversify their sterling corporate bond exposure with an exposure to currency hedged global IG credit. Here’s why:
Rather than only buying sterling IG credit to eliminate currency risk, investors can buy the developed-market IG corporate bonds they deem most attractive from anywhere in the world, after taking currency hedging costs into account.
Successful credit investing is about much more than just picking the highest yielding bonds after factoring in hedging costs, otherwise anyone could be a star credit investor.
Higher yields can reflect higher government bond risk (rate, fiscal and political) or higher corporate credit risk. Higher yields can sometimes still rise further and deliver weaker total returns than lower yielding bonds.
The key is to assess the overall value of a bond taking the government bond yield, the credit spread and the currency hedging cost into account.
One must also compare equivalent credit and duration risks to ensure one is comparing apples to apples.
The sterling corporate bond market comes with a huge bias away from US and towards UK companies, including a significant number of domestically focused firms.
Source: iShares (CRHG) holdings for global and Bloomberg for sterling, data as at 3 July 2026. Eurozone big 5 refers to Germany, France, Italy, Spain and the Netherlands.
Interestingly, the sterling IG corporate bond market is not only much more exposed to UK risk than the global IG corporate bond index, but it is also more exposed to Eurozone and French risk.
This bias away from the US can really matter because while it’s very unusual for the US to experience a recession without the UK and Europe also entering recession, it’s perfectly possible for the UK and/or Europe to experience a recession without the US also going into recession. The Eurozone for example experienced a sovereign debt crisis and recession in 2012, whereas the US avoided a recession and crisis.
With the US dollar the world’s reserve currency, and its debt denominated in a currency which it can print, the US is less exposed to potential sovereign debt crises than some Eurozone countries or the UK.
Limiting oneself to issuers who issue in sterling also dramatically limits one’s opportunity set.
Source: Bloomberg. Data as at 30 June 2026
This results in a number of drawbacks:
The Sterling High Yield bond index is also very small.
This increases the price risk to bonds that get downgraded from IG to high yield in the next recession.
In a recession, the capacity of the local high yield bond market to absorb downgraded fallen angels matters. If the volume of previously BBB rated bonds that get downgraded overwhelms high yield investor demand in that currency, then it could lead to sharp price declines for downgraded bonds.
Source: Bloomberg. Data as of 30 June 2026
The rising share of the IG indices which are BBB rated also emphasises the importance of being able to actively select the most attractively valued BBB rated bonds that the portfolio manager believes can avoid being downgraded in a recession. The larger the opportunity set, the better chance one has of identifying attractively valued bonds that won’t get downgraded.
Source: Bloomberg. Data as of 30 June 2026
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