Shorting credit markets makes little sense in the current environment, according to Maya El Khoury, senior credit portfolio manager at Ostrum AM.
“With yields at 3.5% for IG [investment grade] and close to 6% for high yield, shorting credit is difficult,” she said and continued even more bluntly: “Good luck trying to short credit”.
Credit markets have so far withstood elevated interest rates, the geopolitical tensions in the Middle East and concerns over private credit. For El Khoury, this can continue as long as the economic backdrop holds.
“Credit can handle high interest rates – it has done so before,” she said. “What it cannot handle is recession, deflation or uncontrolled inflation, and we don't expect those in 2026.”
The resilience of credit markets has been evident in recent weeks. Investment-grade spreads widened by around 15 basis points following the escalation of conflict in the Middle East, but the move was modest given the scale of the shock. High yield also widened, but not dramatically. “We're still far from pricing a crisis or recession,” El Khoury said.
Part of that resilience comes from strong inflows. There has been sustained demand for investment-grade credit this year and flows continued even during the conflict. “We've had strong inflows into IG this year,” she said.
Luuk Cummins, portfolio manager in the Loomis Sayles euro credit team, noted that indiscriminate buying through exchange-traded funds (ETFs), fixed-maturity funds, and portfolio trading has supported prices.
“These flows don't focus on relative value, just yield,” he said. “As long as that continues, dispersion will remain limited. When the cycle turns and outflows begin, that's when real price discovery happens.”
El Khoury said her team started 2026 with a moderately long position. Recent widening, particularly in single-B credits, has created selective buying opportunities. “We're starting to see value,” she said. “The key message is that volatility is an opportunity and we are likely to add risk on weakness.”
Paul Lentz, portfolio manager at DNCA Finance, took a more cautious view. He reduced risk and duration ahead of the Iran war, which protected his portfolios from recent moves.
“Going into the rest of the year, it will be very important to understand where the situation is going and the impact on growth, inflation, consumption and monetary policy,” he said.
Lentz said sovereign bonds “are no longer the safe assets they used to be,” and in his view, the traditional 60/40 portfolio model is obsolete.
“We're moving into a world with more frequent volatility shocks, whether due to geopolitics or more active policy. The traditional 60/40 model is behind us.”
That creates a case for flexible fixed-income strategies that can adapt quickly to changing conditions.
“Flexibility and liquidity are now key,” Lentz said. “Investors need strategies that can adapt quickly. Simply holding bonds no longer provides the same diversification.”
Cummins identified specific sectors where opportunities remain. He favoured companies with less exposure to global trade and more local or regional business models.
Utilities are a prime example, as they have “predictable income, defensive models and strategic importance”. Infrastructure and retail also fit the criteria. “These sectors are essential and relatively insulated,” he said.
El Khoury pointed to utilities and financials, particularly subordinated debt, as attractive areas. She expects returns in 2026 to be lower than in 2025, but the environment remains supportive for carry trades in both investment grade and high yield.
Cummins also stressed the importance of active management in an environment where risks are rising.
“When markets are strong, everything works. When they turn, differentiation becomes clear,” he said. “With risks from geopolitics, private credit and AI, the only approach is thorough analysis of each company.”
Artificial intelligence has been a source of concern for some credit investors, particularly around business model disruption and refinancing needs. El Khoury acknowledged the risks but said “it's probably too early to fully price it.
“We saw indiscriminate widening, which created opportunities. For some names, it was unjustified. We used that to add selectively,” she noted.
On private credit, the managers see limited systemic risk despite recent stress. El Khoury noted that the private credit market is estimated at between $1.5trn and $2trn, but not all of it is high risk.
Recent headlines were driven by liquidity mismatches in structures allowing frequent redemptions for illiquid assets. “This is more a structural issue than a systemic one,” she said.
A bigger concern is refinancing. After a decade of low rates, some borrowers may struggle when refinancing at higher rates. Default rates could rise, but El Khoury sees this as a restructuring story, mainly in the US, rather than a systemic crisis.
Cummins agreed. “Compared to the global financial crisis, banks and financial systems are in much better shape,” he said. “Governments and central banks are also better equipped. There may be isolated defaults, but we don't see systemic risk from private credit.”
With central banks not expected to hike rates for now, balance sheets holding up and default rates mostly low, once volatility subsides, the carry on offer makes credit attractive for these managers. As El Khoury put it: “You need a severe scenario to offset the carry.”