Credit technical to remain strong
This week we have seen the continuation of a remarkably strong technical in the credit markets. At the time when S&P 500 index was selling off by nearly 2% on the day, while government bonds were also in the red, spreads in Additional Tier 1s (AT1s), which always represent a higher beta product in the corporate bond universe, were barely changed. In high yield, the picture was similar, with the Xover index in Europe widening by 2-3 bps, while the CDX index in the US had a slightly bigger move. To be clear, this has already been a feature of the market for a few years now and is not new. However, we did want to take this opportunity to highlight some dynamics driving this trend, which we believe is here to stay.
First, end investors often hold diversified portfolios including equities, fixed income, and other asset classes. Clearly, the exact split will vary based on risk appetite, individual situations, and investment objectives, but a common starting point is a “60/40 portfolio”. This represents a 60% allocation to equities and 40% to fixed income. Once established, the objective is generally to maintain this allocation over time. Asset classes that outperform, for example equities, are often adjusted lower through selling and subsequent buying of fixed income instead. In other words, the target asset allocation does not automatically change with changes in market values of underlying investments.
Similarly, in the world of insurance companies, which are also major investors in equities and fixed income, life insurers would often trim gains in equities and reallocate to fixed income when their equity holdings become too outsized – they would also do the opposite if equities sold off.
In this context, it is worth noting that the stock of corporate bonds globally has been decreasing as a proportion of total assets globally in the recent past. Based on our estimates (which are derived from Bloomberg data), as of end 2015, global financial and corporate bonds represented about a third of other public investments (these included global equities, government bonds, and gold). As of end 2025, global public corporate bonds have shrunk to about 23% of the same universe. This analysis is clearly not exhaustive but provides interesting insights into relative weights globally.
The implication is that absent meaningful changes in investor allocation preferences, strong equity performance (which has made that asset class rich), may continue to mechanically support demand for credit. This reflects both the systematic nature of rebalancing by large institutional investors and a prudent desire to lock in equity gains.
Second, we would note that the lower amount of credit outstanding has been driven at least in part by subdued corporate issuance in the wake of higher interest rates post 2022. Rates remain relatively high in the US and the UK, and still well above pre-2022 levels in Europe, suggesting that the credit binge of ultra low-rate environment is not about to begin. That said, part of this phenomenon can be explained by the rapid equity value appreciation of hyperscalers, which have issued debt, but the growth in their debt issuance has not matched the increased in their market capitalisation. Another factor is the rise of private credit, which has taken part of the refinancing needs of corporates. Importantly, leverage across corporates under our coverage has not increased markedly.
Third, these dynamics are unfolding against the backdrop of a rapidly aging population across the Western world. The demand for fixed income products is increasing as investors are hitting retirement age. The preference is often to crystallise equity gains and re-allocate to fixed income alternatives in order to reduce the tail risk and volatility associated with equity markets (this is also why we are seeing rapid growth of annuity products within life insurance companies). In a situation where the credit issuance does not pick up materially from here, to match the appreciating values of equities and commodities, credit will continue to be crowded out as an alternative. This should continue to provide the strong technical bid for the product.
Finally, none of these dynamics would be possible without healthy fundamentals. As these remain sound for the most part, it is unsurprising that credit continues to exhibit technical strength. Given the above considerations, we do not think the trend is going away anytime soon. We believe that a trend change would require significant repricing in equities, which would almost certainly be associated with a bigger downside in that asset class relative to credit.
