From Michael Goosay – Chief Investment Officer, Fixed Income at Principal Asset Management.
Summary of investment implications
EMERGING MARKET DEBT Emerging market debt continues to build momentum, supported by resilient fundamentals, easing inflation, and policy divergence from developed markets. Capital flows remain steady across both local- and hard-currency debt, though tighter valuations and geopolitical risks underscore the need for selectivity. Many EM economies have weathered trade tensions well, enabling central banks to ease ahead of the Fed. Hard-currency spreads are near post-GFC lows, and upcoming political shifts in Latin America may improve credit quality. However, delayed Fed easing or renewed geopolitical stress remain risks, reinforcing the value of careful credit selection and diversification.
PRIVATE CREDIT Private credit ends the year with strong momentum, supported by resilient fundamentals, attractive yields, and expanding roles for nonbank lenders. Borrower and investor demand remains robust, particularly in direct lending and investment-grade private placements. Middle-market borrowers continue to rely on private financing as banks tighten standards, creating opportunities in essential businesses, digitisation, and infrastructure. Investment-grade private placements offer yield and covenant protections, with activity resuming across issuers. As nonbank lenders gain market share, private credit is poised for sustained growth, making it a valuable addition to diversified fixed income portfolios.
INVESTMENT GRADE CREDIT Investment grade (IG) credit is well-positioned, supported by solid fundamentals, healthy demand, and a favourable macro environment despite slower growth. Lower net issuance has created scarcity, bolstering demand for spread products. While financials remain a high-conviction overweight due to favourable valuations and strong capital, consumer-linked credits face challenges. The steepening U.S. Treasury curve has shifted focus to the 5–10-year segment, offering attractive risk-adjusted opportunities. Overall, IG credit remains resilient, allowing active managers to leverage bottom-up credit selection and sector differentiation effectively.
HIGH YIELD CREDIT Strong technicals and stable issuer fundamentals continue to underpin high yield markets. Since mid-April, $14.8 billion in inflows have met limited new issuance, as companies extend maturities and reinforce balance sheets. Although leverage is elevated, interest coverage ratios remain stable. Opportunities remain in rate-sensitive sectors such as capital goods and building materials, though consumer-focused sectors warrant caution. Interestingly, spreads have tracked equities more closely than usual, and valuations are no longer cheap. As such, selective credit analysis remains critical to identifying value and sustaining returns heading into Q4.
STRUCTURED CREDIT Securitized markets remain solid ground. U.S. MBS markets face rising prepayments and potential GSE demand, while credit segments like ABS, CMBS, and RMBS show mixed fundamentals. Fed rate cuts are accelerating prepayments, with roughly a quarter of the mortgage index poised to refinance. Consumer credit shows divergence, with middle- and upper-income households remaining resilient while lower-income borrowers begin to struggle. CMBS refinancing challenges are keeping valuations subdued. Quality in the sector remains key: AAA-rated CMBS and non-consumer ABS offer compelling relative value. Despite heavy issuance, demand continues to outpace supply, reinforcing the importance of active management.
