Where do tighter credit spreads on short dated credit and uncertainty around duration leave investors? Mark Munro, Investment Director, Fixed Income at Aberdeen Investments and manager of Aberdeen’s Short Dated Enhanced Income Fund, gives his outlook for the asset.
We enter 2026 with credit spreads at their tightest levels since before the onset of the Global Financial Crisis. Many popular risk-on areas such as high yield, subordinated financials and emerging market debt have had a very good run over the last 24 months.
And yet flows into fixed income markets continue and the large amount of bond issuance already witnessed in early 2026 is being met with huge demand. Indeed, according to JP Morgan, we have had the second biggest day of corporate issuance in history in the US and the biggest day of European issuance. The reason is that investors are still attracted to the overall yields on offer which remain comfortably above the average levels of the last 20 years.
Throw in the fact that it is unlikely the ECB raise rates this year and there could be another two cuts in the U.S., driven by a very dovish new Fed Chair, and this builds further confidence.
From a macro perspective, things are largely stagnant in Europe while the US continues to motor on though further AI capex investment. It is worth a reminder that historically low growth in the 1-2% range are ideal conditions for credit spreads in investment grade credit, that is to say “not too hot or too cold”.
Fundamentals have to be looked at on a sector-by-sector basis but in general are okay. Banks are doing particularly well and sentiment is improving in the likes of real estate. Autos have many challenges with the credit trend weakening in general, and chemicals and basic materials are yet to come out of their downturn. More scrutiny will come on the tech sector, and specifically AI deliverance and funding.
So where does this leave us? Credit spreads are tight and can still stay tight for longer. We think they will be largely range bound with some perhaps mild widening over the next six months. Spread tightening from here can happen but should not be expected.
Duration is far harder to call than last year. Markets are largely priced for any further rate cuts in the US Curves are likely to steepen a little further in our base case. So, the question arises, as much as we all want to access attractive yield, how much risk are you willing to take to achieve it? How much duration do you really want to take to achieve it?
Short dated credit investing can still provide an attractive level of yield over cash and Government bonds. Considering the environment and current valuations it makes most sense on a risk-adjusted basis. In the Short Dated Enhanced Income Fund, we have reduced exposure to high yield from 17% to under 12%, and taken cash and short dated Government bonds from 10% to nearly 15% over the last few months. This provides an element of de-risking, while also providing fire power to add risk if we see a wobble in risk sentiment in the coming months.
Within this context of slightly lower risk exposure, we continue to like banks, utilities and telecoms, and expect senior bank debt to trade through non-financials again in the coming months. Short dated subordinated bonds, with a call-date within two years, still makes sense to us here. We continue to look for the best ideas across Emerging Markets and Asia, and selective low BBB and BB rated ideas to supplement yield.
Coming back to tech issuance, which emerged as a big theme in Q4 last year, UBS now believes that $900bn of issuance will come from the wider sector this year, 60% of which will be public market. These are undoubtedly large numbers but can be taken down, with small periods of indigestion. We saw this in recent months, which allowed us to access new issues from high quality issuers such as Amazon and Google at spreads of up to 25bps wider than where they traded at the end of H2. The approach here has already been to take profits on the outperformance since issuance and wait for the next entry point.
Main image: mj-duford-P_5mirRrg0k-unsplash
