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For anyone investing in fixed income right now, it’s easy to point to tight spreads and the stage of the economic cycle as a risk factor. But, as a total return credit investor, I’m still comfortable with the outlook for 2026, especially as I have an unconstrained remit. There are multiple sources of return, carry and coupon income being a significant one, and compounding these over a year can lead to good outcomes.

It’s worth remembering that from a historical perspective, despite a backdrop of falling rates, yields remain higher than they have been on average over the last decade. Bonds, in the absence of default, are delivering a strong coupon return right now. Bank that to start.

A lot of my attention is focused on crossover credit, triple-B or double-B rated companies that straddle the line between investment grade and high yield ratings. Valuations here are not as stretched as in other investment grade postcodes and there are still plenty of opportunities for bottom-up credit investors if they know where to look. For now, primary market supply continues to be robust and, in conjunction with our analyst team, I can find names whose valuations are attractive, but who we expect to pay coupons and service debt solidly to maturity.

All that said, I do prefer Europe over the US on valuation grounds. US investment grade spreads are near all-time lows, and there seem to be more opportunities in Euro investment grade. Spreads in the 1-5 year maturity buckets are ok, and we think the subordinated part of the financial capital stack still offers good value for investors who are particularly income conscious. In some cases, we’re able to generate around 150 basis points of yield pickup for A-rated credits when moving from the senior into the subordinated tranches (which comes with a notch lower in credit rating), so the risk-adjusted returns are strong.

All of this, under a total return approach, likely adds up to another good year for credit investors. However, as valuations do become more stretched, avoiding idiosyncratic blow-ups will be essential. Credit selection and distress avoidance will continue to be a very important part of my investment philosophy. But, if things do turn in the other direction, I’ll keep watch for opportunities in any broader market weakness.

James Durance

James Durance

Portfolio Manager