Full Discretion Team Quarterly Credit Update

US credit should remain resilient through the rest of 2026 despite being late-cycle, with strong fundamentals and demand offsetting higher issuance and selective deterioration among AI-related issuers.

• Positive wealth effects, fiscal support, robust profits, healthy manufacturing activity, strong order books and lean inventories underpin the late-cycle assessment.
• Loomis Sayles’ proprietary Credit Health Index indicates that defaults, losses and downgrades should remain below historical averages for this stage of the cycle, supported by strong margins and balance sheets.
• Investment-grade supply is on track for a record year in 2026 as AI investment and datacenter construction accelerate; demand has absorbed the issuance, although investors are demanding wider concessions and differentiating more sharply by issuer quality.
• Investment-grade fundamentals are increasingly bifurcated: non-AI issuers generally remain financially healthy, while many AI-related companies are adopting modestly more aggressive policies to fund datacenter expansion; net upgrades more than doubled from Q1 2026.
• High-yield issuers have retained market access, extended maturities and reduced near-term refinancing risk; leverage is improving, earnings remain resilient and June issuance exceeded $33 billion, the second-highest monthly total on record.

Takeaway: The team favors a constructive credit stance, but investors should be selective as tight spreads, record investment-grade supply and more aggressive financing by AI-related issuers increase differentiation and downside risks.