A compelling case for public credit in a risk-aware world

Speaking at The Inside Network’s Income & Defensive Symposium, Phil Strano, portfolio manager at Yarra Capital Management, made the contrarian case that public investment-grade credit is offering some of the most attractive risk-adjusted returns available in fixed income today. “We are seeing one of the most balanced environments for offence and defence in investment-grade credit that we have had in a long time,” Strano told delegates. Against a backdrop of high equity valuations, stubborn inflation and diverging monetary policy paths, public credit provides a compelling mix of yield, capital stability and liquidity. “It is not just about chasing returns. It is about building resilient portfolios that perform under pressure”.

From a macroeconomic standpoint, the outlook remains uncertain. The United States is grappling with the inflationary impact of tariffs, and while rate cuts are anticipated, they are unlikely to return to the ultra-low levels of the past decade. Australia’s inflation, by contrast, is likely to remain contained, with the Reserve Bank forecast to cut rates in August and November. Still, real growth risks persist, particularly from declining population growth and continued global trade friction.

In this environment, equities are looking expensive. Strano noted that both US and Australian markets are trading at significant premiums to fair value, on earnings yield metrics. “Warren Buffett’s favourite valuation tool is flashing red,” he said, referencing the ratio of market capitalisation to GDP. For advisers seeking alternatives to equity beta, IG credit presents a welcome reprieve, offering higher running yields without the associated drawdown risk.

Strano also highlighted an emerging opportunity in Australian credit markets. As global investors begin to question the long-standing dominance of the US dollar, capital is gradually flowing into other currencies and markets. “The de-dollarisation theme is real, and it is creating a more competitive environment for Australian-dollar credit,” he said. That repositioning is already translating into deeper issuance, greater liquidity and more favourable pricing in the local market.

Relative to US credit, Australian IG credit offers a notable valuation edge. According to Yarra’s analysis, spreads on Australian names are trading as much as 70 basis points wider than equivalent US exposures, despite similar or better credit quality. That premium is further reinforced by historically wide spreads on major bank tier-two securities and BBB-rated corporates, which Strano said are providing investors with “high-quality yield at reasonable risk”.

Perhaps the most forceful part of Strano’s presentation was his critique of Australian private credit. While acknowledging the growth and institutional interest in the asset class, he argued that many private credit funds are no longer delivering adequate return for the risk. “The return premium over public IG credit is insufficient,” he stated. The sector has been flooded with capital, pushing down margins and loosening credit standards, all while transparency and liquidity remain elusive.

Strano also rejected the claim that private lenders are merely taking over the role once held by banks. “If that were the case, we would expect bank lending to decline, but it continues to rise faster than nominal GDP,” he said. This suggests much of the private debt issuance is functioning more as equity replacement than true credit, raising questions about structural resilience during stress events.

In contrast, the appeal of a high-grade, publicly listed credit portfolio lies in its transparency, liquidity and return profile. Yarra’s approach centres on layering core income from high-quality bonds with tactical tools such as duration management, spread compression and sector rotation. “We are not just buying yield. We are actively managing risk, positioning for macro conditions and generating alpha through security selection,” Strano said.

He pointed to recent performance as evidence of the strategy’s robustness. In April, for example, Yarra’s credit strategies delivered positive returns despite wider spreads. “We were able to offset spread volatility with tactical positioning in interest-rate duration,” Strano explained. That flexibility, combined with floating-rate structures, has allowed the firm to remain responsive to fast-changing markets without sacrificing income.

Running yields across Yarra’s public IG portfolios currently sit around 6 per cent. With moderate duration and careful risk calibration, the probability of a negative return over a twelve-month period is low. “You would need spreads to widen by more than 200 basis points to wipe-out the income, and even then, you get some of that back through pull-to-par,” Strano said. For many advisers and clients, that combination of reliability and resilience is hard to beat.

Looking forward, Strano expects total returns in the 7 per cent–8 per cent range through FY2025. “That is comparable to long-term equity returns, but achieved with far less risk and in a more liquid, transparent structure,” he concluded. For advisers seeking to balance growth and defence in client portfolios, investment-grade credit may finally be stepping out from the shadows of equities and alternatives. It is not the flashiest trade, but it might be the smartest.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.