Credit Markets: Income, but Be Selective

US Investment Grade Credit

Higher-quality corporate bonds, particularly in the United States, remain relatively stable. Strong earnings and resilient companies have supported this part of the market, although the gap between stronger and weaker businesses is becoming more noticeable.

What this means for portfolios:

Investment-grade credit remains an important source of income, with a focus on financially strong companies with predictable cash flows.

US High Yield Credit

High yield bonds continue to offer higher income but also carry greater risk. Slower earnings growth and higher levels of debt mean some companies may come under pressure if conditions tighten further.

What this means for portfolios:

We continue to favour shorter-dated bonds to manage refinancing and economic cycle risk.

Government Bonds: Focus on the US

Government bonds outside the US continue to offer limited real return potential, especially as inflation remains elevated. By contrast, US government bonds still play an important role in providing stability within portfolios.

What this means for portfolios:

We maintain a preference for US government bonds as a source of diversification and stability.

Emerging Market Debt: Less Attractive Than Before

Emerging market debt has become less attractive due to currency weakness, higher energy prices and a stronger US dollar, all of which reduce overall return potential.

What this means for portfolios:

We remain cautious and selective, waiting for improved currency stability and better valuations.