The first half of 2026 has tested investors' nerve. The Iran conflict has pushed oil prices higher, repricing inflation expectations and reshuffling the earnings outlook across sectors. AI continues to reshape entire industries at speed. And yet, for investors willing to look through the volatility, the case for corporate credit over government bonds remains strong.
The headline numbers speak for themselves: high yield bonds are currently delivering yields of around 7%, with investment grade above 5% in USD. In a world where equity valuations remain stretched and government bonds offer little protection against further fiscal deterioration, that income stream is hard to dismiss. In a non-recessionary environment – which is our base case – investors in high yield can potentially earn 7–9% per year through coupon income alone, without needing a heroic call on rates or spreads.
This is not a passive bet. Selectivity is doing more work than ever. The same macro forces driving dislocation are creating opportunity for those with the discipline to distinguish genuine credit risk from sector-specific noise.
We are positive on financials, which continue to benefit from a structurally higher rate environment, and on energy, where commodity prices remain elevated. Defensive exposure through consumer goods and telecoms provides balance. Conversely, we are cautious on the lowest-quality corner of the market – CCC-rated issuers – where weaker revenue growth, floating-rate refinancing pressure and structural disruption are combining to squeeze margins.
What is perhaps underappreciated is the strategic role high yield can play within a broader portfolio. We view defensive, developed-market high yield as a core fixed income building block: a stable source of income through time. Our current positioning reflects confidence in today's yield environment while preserving the capacity to act if valuations improve further. Should high yield yields move towards 8.5–9%, we would be prepared to increase that allocation meaningfully.
Duration remains a point of discipline rather than opportunity. Fiscal deficit concerns and the lingering inflation tail risk from the Iran conflict argue for conservatism at the long end of the curve. Our framework is straightforward: when markets price in two cuts, we want to be shorter duration; when they price in two hikes, we become more willing to add duration, because the market may have moved too far.
As is usually the case in credit, and the broader investment landscape, the picture is nuanced. But the underlying message is constructive. For investors prepared to engage with the complexity rather than retreat from it, global credit continues to offer its best attributes: reliable income with clear upside if the cycle holds.
