Credit Strategy

Credit markets entering 2026 are characterized by a favorable default outlook and historically tight spreads, necessitating a strategic pivot toward yield-enhancing complexity. While EUR and USD High Yield default rates are forecast at manageable levels of 2.2% and 3.8% respectively, investment-grade spreads have compressed to the 1st-2nd percentile, leading managers to seek illiquidity premia in asset-backed finance and private placements. Performance remains divergent across regions and sectors; for instance, while corporate leaders like ABB show improving credit profiles and potential net cash positions, Mexico has seen private sector credit growth decelerate sharply to 2.6% amid legislative uncertainty. In the financial sector, the €140bn European AT1 market remains resilient despite regulatory scrutiny, as the cost of replacing these instruments with common equity remains prohibitive. Meanwhile, the supranational landscape is shifting with a reduced €577bn EU RRF envelope and new funding requirements for defense and Ukraine facilities. Ultimately, credit strategy is increasingly focused on deep fundamental research and the capture of carry, as idiosyncratic company-specific factors replace systemic volatility as the primary driver of returns.