Credit’s Circular Conundrum

Credit remains attractive, but with tight spreads and rising issuance, future returns will depend increasingly on carry, issuer selection and avoiding credits exposed to refinancing and AI-investment risks.

• Despite geopolitical shocks during summer 2026, Euro investment-grade spreads stayed near 74–78 basis points and Euro high-yield spreads around 250–270 basis points between 31 May and 27 August.
• Corporate fundamentals remain broadly resilient: Moody’s recorded fewer defaults in the first half of 2026 than a year earlier, while the high-yield default rate was 4.4%, close to its long-term average.
• Fiscal pressure should keep sovereign term premia elevated: the US federal deficit was close to 6% of GDP in the first ten months of fiscal 2026, and the IMF expects global public debt to reach 100% of GDP before the end of the decade. Euro investment-grade and high-yield yields were approximately 3.7% and 5.5%, respectively, although much of that income comes from the sovereign curve rather than corporate spreads.
• AI infrastructure is creating a major supply test: hyperscaler bond issuance rose from about $14 billion in 2024 to $87 billion in 2025 and $139 billion in 2026 year to date, with outstanding US-dollar bonds approaching $400 billion. A further $50 billion of high-yield issuance is expected from already-signed leases.
• Refinancing, sector disruption and political resistance to data centres are increasing dispersion, affecting borrowers exposed to higher coupons, Chinese competition, GLP-1 treatments, energy costs and generative AI commoditisation.

Takeaway: Candriam remains positive on investment-grade credit and selective on BB, crossover and subordinated investment-grade issues, while preferring defensive businesses and avoiding CCC and weaker B borrowers whose resilience depends on easy refinancing; returns in 2026 and 2027 are expected to come from selected carry and active management rather than broad spread compression.