Despite high spread volatility, investment-grade credit portfolios have generated
an average annual spread premium (returns net of U.S. Treasury returns and
defaults) of 48 bps over the past 20 years. The authors show that relaxing a
common portfolio constraint that requires selling downgraded bonds would have
allowed investors to capture an average annual spread premium of 86 bps, with
similar risk. Thus, adopting a downgrade-tolerant credit benchmark could
generate a higher credit spread premium.