2 Apr 2026 - Unravelling the forces driving corporate credit's resilience

Corporate credit has absorbed recent shocks with limited disruption. Head of High Yield Tom Ross and Corporate Credit Portfolio Manager James Briggs examine how fundamentals, market behaviour and dynamics as well as macro context are shaping credit resilience.

Credit markets sanguine amid geopolitical risk

The conflict in the Middle East has drawn parallels with the outbreak of the Russia-Ukraine War, with concerns that an oil-induced supply and inflation shock could harm the global economy. So far, credit markets have reacted in a sanguine manner, with changes in credit spreads not dissimilar to the rates impact from rising government bond yields.

As the chart below shows, the recent tick-up in credit spreads is muted when compared to last year's Liberation Day sell-off, let alone the 2015 energy sell-off after oil prices collapsed or the Covid spike.

For now, the market assumption is that the conflict remains regional, although high oil and gas prices - caused by Iran's choke hold on ships transiting the Strait of Hormuz - could have a material impact on inflation and consumption were they to be sustained beyond the short term. For the time being, geopolitical shocks have not yet translated into a material deterioration in key economic data. So far, we see this as a volatility event rather than an economic event impacting inflation and consumption.

Figure 1: Credit spread on high yield and investment grade corporate bonds 

^{Source: Bloomberg, US HY = US High Yield:ICE BofA US High Yield Index; EUR HY = Euro High Yield: ICE BofA Euro High Yield Index,  US IG = US investment grade: ICE BofA US Corporate Index, EUR IG = Euro Investment Grade: ICE BofA Euro Corporate Index, Govt OAS (option adjusted spreads over governments), 01 January 2014 to 13 March 2026. Bps= basis points. Spreads may vary and are not guaranteed. Past performance does not predict future returns.}

The forces behind corporate credit's resilience

We believe there are several reasons why the corporate bond markets have responded in such an orderly way.

First, investor positioning is light given credit spreads are at the tighter end of historical ranges (Figure 2). Anecdotally, most investors were neutrally positioned heading into this conflict and waiting for more attractive valuations to add risk. Recall that there had been nervousness around artificial intelligence (AI) disruption and private credit fears earlier in the year.

Figure 2: Positioning in credit is light, as market trades short

^{Source: ICI, Bloomberg, DTCC, BNP Paribas. The BNPP Positioning Indicator (BNPPIUS, BNPPIEU) reflects data on dealer inventories, funds' cash balances, Commodity Trading Advisors (CTA) positioning, Credit Default Swap (CDS) market positioning and option hedging, as at 12 March 2026. The BNPP Credit Positioning Indicator shows how long (positive number) or short (negative number) investors are positioned in credit markets, indicating whether exposure to credit risk is extended, neutral or defensive.}

Second, there has already been a reasonable amount of corporate bond issuance so far this year. US investment grade issuance was US$474 billion in the first 10 weeks of the year, up 6% compared to the same period in 2025, and US high yield and loans (leveraged finance) issuance was US$64 billion, up 34% compared with the same period in 2025. Over the same period European investment grade issuance is €170 billion, down a marginal 3%, but European high yield is €23 billion, up 40% year- on-year.¹

A key concern has been the scale of tech-related issuance, particularly for the investment grade market. However, the hyperscalers have made good progress with their capital raising, with Oracle claiming they do not expect to issue any additional bonds for the remainder of the calendar year 2026.²  Taken together, companies have been successful in borrowing earlier in the year which should take some pressure off needing to come to the market in the very near term. The strong technical (market dynamics) picture that has been in place should remain intact.

Third, turning to demand, higher yields are already attracting yield sensitive buyers, such as insurance companies stepping in as we have heard anecdotally. Yields on US high yield are back above 7% and are at 5.7% in European high yield. US investment grade is above 5% and European investment grade at 3.5%.³ As explained earlier, a portion of the yield change has been due to the rise in government yields reflecting higher inflation expectations. This has led to a moment of positive correlation between rates and credit spreads, which tends to be temporary.

Credit fundamentals resilient

Another backstop to credit spreads is that corporate fundamentals generally remain supportive. Earnings expectations have not rolled over and continue to underpin credit quality.  Near�'term earnings face a relatively low hurdle, as Q1 results last year were depressed by tariff speculation, limiting downside risk as we move through the upcoming earnings season. Consensus expectations point to a healthy 20% earnings-per-share growth by Q4 versus Q1, consistent with the typical second�'half earnings catch�'up seen in prior years. Even if those forecasts ultimately prove optimistic, interest rate coverage - earnings covering interest expenses - are broadly stable across investment grade and leveraged finance (high yield and loans).

With macro growth still resilient - particularly in the US - credit quality is expected to remain robust enough to absorb market volatility. This provides a supportive macro backdrop for sufficient cashflows to service generally stable and manageable leverage levels. With all�'in yields at attractive levels, fundamentals and earnings serve as the anchor to allow investors to lean into wider spreads where attractive risk-adjusted potential can be captured. This is rather than idiosyncratic risk or geopolitical volatility spooking investors as signalling the start of a more adverse credit cycle.

Idiosyncratic stress is rising - but is not systemic

To take a step back then, there is no evidence of a broad earnings downgrade cycle emerging across investment grade or high yield credit. Recent market volatility is increasingly being driven by idiosyncratic rather than broad�'based credit risk, with stress emerging unevenly across sectors and issuers.

One area this surfaced in is software, where dispersion widened sharply and price action was severe in specific names as AI-related concerns dominated around revenue displacement. While software is a small component of high-yield indices, the volatility emerged more in the loans market, which has become increasingly bifurcated and private credit. For loans, selective mispriced opportunities have emerged, while CLOs, the main buyer of loans, continue to launch, with many warehouses looking for loans, supporting demand in the near term. This is important as leveraged finance does well in environments where readily available refinancing is present.

Private credit, on the other hand, is facing rising redemption pressure. We are seeing headlines around the gating of funds and increased scrutiny of asset values, alongside banks reassessing collateral valuations and pulling back from certain lending relationships. Nevertheless, this adjustment appears to be gradual and uneven, unfolding over time rather than triggering an immediate spillover into public markets.

In this context, stress in private markets need not be destabilising for public credit. As capital becomes more cautious it tends to be redeployed conservatively, such as into short-dated bonds or liquid investment grade credit. This may present a modest but constructive technical (demand) for public markets, particularly at a time when yields have become more attractive and markets are sensitive to reward the winners.

Rising dispersion from a K-shaped economy

The credit market is increasingly characterised as resembling a K-shaped economy, with deepening dispersion between higher-quality issuers and weaker credits. Stronger issuers continue to trade with resilience, while weaker credits are being repriced more sharply. This is notably apparently in Europe for example in single�'B rated names, where spreads have moved much wider with weakness seen in technology and chemicals, even as index�'level moves remain modest (Figure 3). The widening gap between B-rated bonds and BB-rated bonds underscores how risk is being priced idiosyncratically, not indiscriminately across credit markets.

Figure 3: Single Bs are tighter excluding technology and chemicals

^{Source: Barclays, as 16 March 2026. Spreads may vary and are not guaranteed. Past performance does not predict future returns.}

For credit investors, this creates an opportunity that is incremental rather than wholesale. Valuations have moved off their tightest levels, but remain far from historic stress points, suggesting scope to add risk selectively. With spreads still tight in aggregate and macro uncertainty elevated, timing and discrimination matter. After all, historical analysis suggests that oil price shocks typically take months to mean-revert once conflicts stabilise.

The opportunity therefore lies not in chasing beta, but in leaning into dispersion and adding risk where repricing has been meaningful and fundamentals remain intact, while remaining cautious where valuations have yet to adjust. In that sense, the current environment rewards patience and selectivity, allowing credit investors to engage constructively and with confidence that the forces underpinning resilience remain firmly in place, and in some cases appear to have strengthened.