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The non-investment grade credit market has undergone a profound transformation. What began decades ago as a niche “junk bond” segment has evolved into a core component of institutional portfolios. Today, the high yield bond market is nearly USD 1.5 trillion in size, with half of the universe rated BB – at the upper end of the non-investment grade spectrum. These are not speculative issuers, but increasingly stable businesses attracting pension and insurance capital.

The syndicated loan market, similarly institutionalized, now rivals high yield in size and significance. Once the domain of banks, it has grown into a USD 1.5 trillion floating-rate market with robust participation from asset managers, CLOs and institutional lenders. The Credit Investments Group (CIG) has been at the heart of this evolution, managing close to USD 60 billion in assets and drawing on a track record that dates back to the late 1990s.

The current environment is shaped by uncertainty. Tariffs, shifting trade policies, interest rate speculation, and geopolitical instability have created an unpredictable backdrop for investors. However, this has also strengthened the case for liquid credit, particularly in areas that offer yield with defensive characteristics.

The combination of resilient corporate fundamentals and a slower supply pipeline is creating technical tailwinds. Fewer new issues are coming to market, while income-focused investors continue to allocate to floating-rate and high carry products. The result is a supportive technical backdrop, even in the face of macroeconomic noise.

Loans and high yield bonds remain par-priced asset classes, but today they are trading below par – offering an attractive entry point for long-term investors. Many performing double B and single B loans are trading in the mid-90s, while parts of the high yield market have repriced due to rates rather than credit concerns.

These dislocations present unique convexity opportunities. In the loan market, discounted names with solid fundamentals provide price recovery potential. In high yield, quality issuers have been affected more by rising interest rates than by deteriorating creditworthiness, offering upside without necessarily taking on additional credit risk.

Identifying where risk lies – and where it doesn’t – is central to success in credit markets. CIG’s investment process is built on rigorous credit analysis, with teams of sector specialists covering specific issuers across New York and London.

Understanding whether price moves are driven by fundamentals, technicals, or rates helps identify potential sources of value. Credit selection today is not about simply avoiding defaults – it’s about recognizing when market inefficiencies create mispricing. This disciplined process enables investors to stay focused on carry and convexity, while mitigating unnecessary volatility.

Advisors and institutional investors increasingly view non-investment grade credit as a core allocation within multi-asset portfolios. With lower duration than traditional fixed income and higher risk-adjusted returns than many equity strategies, credit plays a critical role in balancing yield, diversification, and defensiveness.

Single-asset strategies (loans or high-yield) allow for targeted implementation, while multi-asset credit strategies offer flexible allocation across the spectrum. The growing convergence between loans, bonds, and even private credit markets further supports a unified, research-driven approach to credit investing – enabling flexible allocation across a broader universe of credit instruments.

While the structural outlook remains positive, recent market moves underscore the need for active management. In early April, we saw both loans and high yield down approximately 1.5-2.0% in the first few business days of the month, as spreads widened amid weaker sentiment and policy-driven headlines. Both asset classes ended up flat in April. Compared to equity markets, however, credit proved resilient: lower volatility, smaller drawdowns, and more stable fundamentals.

Loan spreads widened moderately, but valuations remain more compelling than in equities, particularly given lower day-to-day volatility. While some further spread widening may occur, the repricing helps normalize markets and could pave the way for steady performance in the second half of 2025 – largely in line with carry.

High yield’s larger exposure to cyclical sectors, particularly energy, contributed to relative underperformance. Yet, the segment is starting this period from a position of strength. Balance sheets have improved, and the quality mix has shifted upward, providing a more robust foundation than in prior cycles.

The expanding private credit market plays a growing role in shaping the landscape. In times of market stress, direct lenders have absorbed transactions that might previously have caused volatility in syndicated markets. This has created a stabilizing effect: transactions are completed off-market, reducing new issue pressure and smoothing technicals in public credit.

Moreover, many issuers now operate across both private and public credit markets. For investors, this means opportunity sets are blending – and the tools to access them must evolve accordingly. Strategies that can invest across broadly syndicated loans, high yield bonds, and CLOs, which CIG have experience and track record in managing, are well positioned to take advantage of the full credit spectrum.

Despite market swings and policy unpredictability, the fundamental thesis for non-investment grade credit remains intact. Income remains the dominant driver of return, and careful selection provides avenues for capital upside. With improving valuations and disciplined underwriting, we believe the market offers compelling opportunities for active managers focused on credit quality and relative value.

For allocators, the choice is not about market timing – but about finding the right partners, processes, and platforms to navigate complexity with conviction.