At first glance, today’s credit market looks remarkably resilient. Spreads are tight, yields are high and income investors are enjoying returns not seen since the early 2000s. But in this line-up of assets, not every horse is race-ready.
High-yield debt, long-dated investment-grade bonds and private credit may all offer compelling yields, which can play a role in a balanced, diversified portfolio. But beneath the surface, some of these assets resemble the pre-2008 structured credit complex: opaque, over-engineered, and underpriced for risk. In particular, private credit has exploded in popularity, ballooning to $2.5 trillion – up from just $200 million in the early 2000s[1]. While there are opportunities to be found in this asset class, investors should approach with caution.
Part of the bigger problem when it comes to investing in fixed income is psychological. Markets are still wired for a low-rate world. After more than a decade of ultra-loose monetary policy, investors continue to chase yield, overlooking liquidity, credit quality and macro headwinds. But that world has shifted: inflation is proving sticky and central banks have far less room to manoeuvre.
This regime shift is being shaped by several forces.
Geopolitics and the global inflation surge
Conflict in the Red Sea, war in Ukraine and China’s inward turn are splintering global supply chains, driving up costs. The US has essentially shut its southern border – a move that could squeeze the labour supply and push wages higher – and continues to impose sweeping tariffs on imports. Meanwhile, Europe is abandoning austerity in favour of big-ticket spending on defence and decarbonisation. These are not temporary disruptions – they are long-term inflation drivers.
Orthodoxy is over
Post-Covid, voters expect government support, and as a result, fiscal orthodoxy is a thing of the past. Politicians are obliging, committing cash to everything from infrastructure to the green transition to defence budgets. For the time being, austerity is off the table. This all points to more demand, more deficits and more debt.
Labour Market Pressures
Labour markets are structurally tight, and wage growth, driven by ageing demographics, restrictive immigration policies and strong consumer demand, remains elevated. At the same time, unionisation is gaining ground and reshoring is accelerating. These factors mean the US labour market is likely to remain tight for years, with Europe facing similar constraints, especially in energy-intensive and public sectors.
Duration is losing its utility
Long-dated bonds used to be a reliable hedge in risk-off environments, but in inflation-led downturns, both bonds and equities can decline in tandem. We saw this in 2022 and again in parts of 2023.
So, where should fixed-income investors turn?
My answer: short-dated investment-grade credit. It may not be glamorous, but it is well-suited to this new regime, offering capital preservation, real yields and shock absorption.
Take One Savings Bank 2028 or EDF 2029 – yields are around 7%. These are not fringe names; they’re high-quality issuers with limited duration risk and strong inflation-adjusted return profiles.
And the maths works. If yields rise by 1%, long-dated bonds can suffer double-digit losses. By contrast, short-dated bonds with one- or two-year durations can still generate positive returns. With risk-free rates so high, you don’t need to take big swings. You just need to clip the coupon.
Some believe that if equities fall, bonds will provide ballast. But this only works under the assumption that inflation is under control, and even then, I am not so sure. If inflation remains elevated, both stocks and long bonds could fall together.
Here’s the silver lining: short-dated investment-grade credit is still mispriced for its risk. The return profile is resilient to rate volatility and attractive enough to meet real return targets. In an uncertain world, this opportunity still adds up.
Furthermore, the case for short-end credit also underscores the value of active management. According to data by Morningstar, active fixed-income managers had a notably stronger year than their equity counterparts. Across core bond categories like intermediate core-plus bond and multisector bond, more than 63% of active funds outperformed their passive peers over one year[2]. In short, managers can add value through active duration positioning – a valuable skill that should not be overlooked amidst sticky inflation and fiscal loosening.
In this new environment, we must be prepared for the correlation between equities and bonds to stay positive, as when both fall together, only the assets with true risk-adjusted resilience will shine.
So yes, we might be in the knacker’s yard. But the best-looking horse, short-dated investment-grade bonds, is still worth backing.
[1] Bank of International Settlements: The global drivers of private credit (11 March, 2025)
[2] Morningstar: US Active/Passive Barometer Report: Year-End 2024
Lloyd Harris is head of fixed income at Premier Miton Investors. The views expressed above should not be taken as investment advice.