Corporate bonds offer best rolldown returns in 3-to-5 year range
Investors seeking the highest returns from the passage of time should look to the 3-to-5-year range of government bond curves in the UK, Europe, and the US, according to analysis of 20 years of data. In a normal yield curve environment, the yield on a bond falls as it approaches maturity, a phenomenon known as “yield curve rolldown.” This creates a scenario where a bond’s price rises simply because time is passing. The study found that this strategy offers the best risk-adjusted returns across the three major markets.
Does credit work the same way?
Analysts expanded this research to corporate credit, measuring how credit spreads, the yield premium over government bonds, change as bonds move down the curve. They examined investment grade and high yield bonds in Europe and the US, focusing on the 2-to-7-year maturity range for the strongest results. In all three currencies, this maturity range generated the highest levels of spread roll down per unit of risk. The study defines this efficiency as the credit spread roll down return per month divided by the interest rate risk, or duration, inherent in the bonds.
While longer-dated bonds offer the potential for larger absolute gains if credit and duration calls are correct, they are less efficient at capturing rolldown. The data shows that the “free lunch” of rising prices simply from time passing is available in corporate bonds just as it is in government bonds. The most efficient instruments in this strategy vary by currency and credit rating. Sterling investors should focus on 4-to-5-year BBB-rated bonds, while euro investors found the 2-to-3-year maturity range offered the best returns across almost all credit ratings. In US dollars, the single B to BBB+ buckets proved most effective, spanning roughly 2 to 6 years in duration.
The efficiency of spread roll down differs depending on the currency and the credit rating of the bond. In sterling markets, the 4-to-5-year maturity band for BBB-rated bonds provided the highest efficiency. Euro investors saw near-uniform success with 2-to-3-year bonds, particularly in the single B and lower investment grade categories. For dollar investors, the sweet spot lay in the single B to BBB+ buckets, though the maturity profile showed slightly more dispersion.
The analysis, which used end-of-month data from July 2006 to May 2026 from IBoxx Corporate indices, confirms that corporate bonds also offer this mechanism for price appreciation as they mature. This suggests that for investors comfortable making duration and credit calls, moving further out the curve can yield vastly more money than shorter-term instruments.
