Globalcredit markets have entered the final quarter of 2025 in remarkably good shape. Corporate fundamentals remain robust: earnings across sectors have generally surprised to the upside, leverage is low, and balance sheets are strong, in contrast to sovereign balance sheets, where leverage remains elevated. This unusual dynamic — corporates demonstrating greater financial discipline than governments —helps explain why credit spreads remain so compressed.
Rating momentum continues to trend positively, while default rates are comfortably manageable. Within the high yield universe, approximately of issuers are now rated BB [1], reflecting a clear shift toward quality. The average duration of around [2] further supports the asset class by limiting sensitivity to future rate fluctuations.
Overall, corporate financial health remains solid, liquidity buffers are ample, and refinancing risks are limited. Against a backdrop of subdued growth and fiscal fatigue, corporate credit continues to offer one of the most compelling risk–reward profiles within fixed income.
The technical backdrop for credit remains strong. Both Investment Grade (IG) and High Yield (HY) markets have seen since the beginning of the year, with investors re-engaging forcefully with the asset class, particularly through mutual funds.
In the Investment Grade segment, yet the market’s absorption capacity has proven impressive. Demand remains broad-based and deep, reflecting investor confidence in the resilience of corporate fundamentals.
Conversely, the High Yield market has been supported by . Much of the recent issuance, particularly in September, has been aimed at refinancing existing debt rather than raising new capital. This supply constraint, combined with steady inflows, continues to underpin valuations and stabilize market dynamics.
The result is a powerful combination: strong demand, manageable issuance, and growing investor comfort with credit as an attractive source of income in a world still marked by macroeconomic uncertainty.
From a valuation standpoint, yields remain appealing. The Euro Investment Grade segment currently offers around [4] — levels that provide a meaningful cushion against potential spread widening. These carry levels translate into a solid income floor for portfolios, particularly in a low-volatility environment.
Yet, spreads themselves leave little room for error. Under normal circumstances, such tight spreads would not necessarily be alarming — yield harvesting remains viable — but today’s context is far from normal. The global macroeconomic landscape is fragile: structural headwinds such as slower productivity, ageing demographics, and the ongoing energy transition continue to weigh on growth and raise uncertainty.
At the same time, fiscal space is constrained — sovereigns are already heavily indebted, limiting their ability to provide meaningful counter-cyclical support. While monetary authorities could step in, a new and increasingly material risk has emerged: the challenge to the independence of the Federal Reserve.
This development is more than a political footnote — it strikes at the heart of global market confidence. If the Fed’s autonomy is curtailed, its ability to act swiftly and decisively in times of stress could be compromised. Moreover, any perception that monetary policy decisions are being influenced by short-term political considerations would undermine the institution’s credibility, particularly at a time when it is navigating the early stages of a rate-cutting cycle.
Such a loss of credibility could have far-reaching consequences: higher risk premia, greater volatility, and diminished confidence in policy backstops. For credit markets, where pricing and sentiment are deeply intertwined with the perceived reliability of central bank actions, this represents a significant and relatively new systemic risk.
Adding to the paradox, volatility indicators such as VIX and MOVE have moved lower this year [5], while spreads stay stretched. This combination — low risk premia and low volatility — often signals market complacency, or even mild exuberance.
This environment calls for a nuanced, bottom-up approach. With dispersion likely to increase, investors will need to lean on deep fundamental research to differentiate resilient issuers from those more exposed to macro fragility. Sector and issuer selection will once again become the primary driver of outperformance.
In our view, both Investment Grade and High Yield remain fundamentally interesting — supported by solid balance sheets, healthy cash flows, and appealing yields. However, the road ahead will likely be marked by higher dispersion and greater uncertainty, which makes active management and credit selectivity essential.
A successful credit strategy in this phase rests on three guiding principles:
The credit market of late 2025 offers both opportunity and risk in equal measure. The fundamentals are reassuring, the technicals powerful, and the yields generous. But beneath this strength lies a complex macro environment that demands humility and precision.
In short, credit remains a rewarding place to be — provided one enters it with discernment rather than complacency.
[1] Source: Bloomberg, ICE BoA index as at 26 September 2025
[2] Source: Bloomberg, ICE BoA index as at 26 September 2025
[3] Source: Bloomberg, ICE BofA Euro Corporate index, 29 September 2025
[4] Source: Bloomberg, ICE BofA Euro High Yield index, 29 September 2025
[5] Source: Bloomberg. The VIX and MOVE indices measure market volatility, VIX for US equities, and MOVE for US Treasuries. They are derived from the price of options.
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