A strong start for credit, but discipline is key

On Monday, risk markets opened on the front foot after largely shrugging off the weekend’s geopolitical news. Stock markets rallied, led by large-cap energy companies that stand to benefit from the "opening" of Venezuelan oil markets, while credit spreads were tighter across the board, continuing the positive trend seen at the end of last year. 

The resilience of credit (and risk markets) to the geopolitical volatility we have had over the past few years is not new, and largely points to the fact that in the face of this volatility corporate fundamentals have remained solid, while technicals within credit markets remain highly supportive. Indeed, the first week of 2026 has already seen a number of issuance records. US investment grade has printed more issuance in the first two days of the year than ever before in a comparable period, while Wednesday saw the largest single day of issuance for Euro markets in history. 

The vast majority of issuance has been higher quality (BBB-rated and above), but we have also seen, particularly in the US, a couple of deals at the riskiest end of the credit market, with the first week of January to be the busiest since September for CCC issuance in the US. Order books remain buoyant, with subscription rates in many deals reaching seven to eight times the issue size. From an issuers perspective they are getting these done at very little new issue premium, with spreads at the tighter end of historical averages and as credit markets open to trade, issuers are getting the deals they need done at decent prices. For example, yesterday Groupama issued a Restricted Tier 1 bond (euro denominated, BBB rated, 7.5 years to first call) that printed 62.5bps inside initial price talk and with books that were 8.3x over subscribed. ENEL, meanwhile, issued a 6- and 9-year hybrid at the tighter end of guidance with books almost six times oversubscribed. 

These are transactions that the market is clearly willing to absorb, even with spreads where they are. At the same time, outright yields within credit markets remain elevated versus historical averages, particularly in investment grade. Against a backdrop of elevated yields, sound fundamentals, and strong downside protection, the risk-reward in credit generally remains healthy. 

That said, the current spread (and geopolitical) environment warrants selectivity. Avoiding the accidents in this market is more important than picking the winners, as is usually the case for credit. The beauty of this however, is that you can build a portfolio of bonds that are giving you mid to high single digit yields without taking the type of credit risk you would have had to take in 2021 to get that sort of return. For example, the yield on the single B euro index in Sep '21, is actually lower than the current yield on the BBB index.

Ultimately, we think this is a great environment to be invested in credit but not an environment to be taking a huge amount of credit risk, while portfolios that build in liquidity buffers will be best placed to take advantage of credit volatility when it eventually emerges. We are mindful that technical strength can only take the market so far before irrational exuberance kicks in. However, if buoyant conditions persist, with spreads continuing to rally and large amounts of supply continue unabated, it is highly likely that at some stage investment bankers will start knocking on the doors of issuers that should not be coming to the market. Careful credit selection will therefore remain critical.