Picture this: The ‘Big Shrink’ in high-yield markets
The US high-yield market has contracted by 11% since its peak in December 2021. The Multi-Asset Credit team explains what this means for investors.
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Market summary
- Global credit markets experienced another positive quarter, resulting in strong returns for 2025 across much of the credit universe.
- One of the top-performing market segments over Q4 and 2025 was the agency mortgage-backed securities market, where the credit risk premium fell (spreads tightened) as interest-rate volatility eased and the Federal Reserve’s rate cuts provided a boost.
- US high-yield delivered positive returns over 2025; although spreads widened (credit risk premium increased) in Q4, a combination of carry (income) and falling Treasury yields boosted returns. The US investment-grade market also benefitted from falling US rates, despite spreads widening slightly.
- Returns in the European high-yield debt market were more muted over Q4; despite spreads tightening, rising sovereign yields dampened returns. A similar story unfolded in the European investment-grade space, where rising sovereign yields largely offset spread tightening.
- Elsewhere, the bank capital (AT1) market continued to perform well. Spreads continued to tighten, while carry provided a consistent source of return. Returns on collateralised loan obligations (CLOs) were positive for Q4. Over the full year, lower-rated CLO tranches outperformed, reflecting positive risk sentiment.
Where to focus and what to avoid
- Despite tight headline valuations, dispersion remains relatively elevated across and within asset classes, creating opportunities for active, bottom-up investors.
- Our sector positioning broadly favours defensive over cyclicals, and we continue to focus on areas like financials, which are more domestically oriented and less impacted by potential trade wars.
- We continue to favour areas that offer attractive income and favourable downside characteristics, such as hybrids, structured credit, and selective parts of the short-duration high-yield and loan markets.
- In more traditional markets – such as US and European investment-grade – credit spreads remain near the tightest (most expensive) levels seen in previous cycles, so investors should be wary of simple beta allocations to these sectors.
For the full breakdown of Q4 and to see our latest scorecards for the credit universe, read the PDF below.
