While credit markets proved to be relatively resilient in the face of multiple geopolitical events, there is no guarantee that this will always be the case. So, how do we see credit markets against such a backdrop?
Heading into 2025, markets expected a transition towards monetary easing as inflation cooled and growth moderated. That broad roadmap played out, although the path was uneven. In the US, the Federal Reserve (Fed) delivered further rate cuts, as did the Bank of England. The European Central Bank, however, shifted firmly into a “hold” stance after a sequence of cuts.
It was another eventful year geopolitically. US president Donald Trump’s “Liberation Day” tariffs in April 2025 imposed a sweeping 10% baseline tariff on nearly all imports, with higher country‑specific rates to follow. Markets reacted sharply, with investment grade (IG) yields spiking to a peak of almost 120 basis points (bps) versus 93bps pre-tariffs. As policy rhetoric softened, IG responded well, with spreads in the US reaching 25- year lows, tightening to roughly 0.75% over Treasuries by August.
Looking ahead, 2026 will be defined by dispersion, shaped by three macro themes: asynchronous monetary policy; an expansion in corporate capex around artificial intelligence (AI); and shifts in supply-demand dynamics. The surge in AI infrastructure spending is particularly important. As hyperscalers fund global data centre, grid and network expansion, supply is expected to rise but remain manageable. AI-linked issuance is expected to be a meaningful but orderly driver of IG supply rather than a destabilising wave.
Valuations enter 2026 a little on the rich side, with global IG spreads well below long-run averages and both US dollar and euro markets modestly expensive on a quality and duration[1]adjusted basis. Even so, technicals remain supportive: IG still offers an attractive yield premium over equities, while strong demand from long-horizon investors – for example, fully funded pension schemes – continues to anchor spreads and limit widening pressure.
However, the tightening we saw in 2025 suppressed dispersion, compressing spread differentials across quality tiers. With spreads already rich, the upsides from further tightening are now asymmetric. In a more volatile or supply heavy environment – particularly if debt-funded M&A accelerates or AI capital expenditure (capex) proves uneven – lower quality bonds could widen faster.
IG in 2026 is therefore poised for solid, carry-driven total returns, but with greater differentiation under the surface. We entered 2026 close to neutral overall risk and favouring higher quality issuers, the seven- to 12-year part of the curve, and senior over subordinated capital structure risk. Market leadership should rotate towards resilient balance sheets, regulated or infrastructure-linked sectors, and issuers positioned to navigate a new, more selective credit regime.
In short, while 2025 rewarded beta, 2026 will reward portfolio construction.
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