Finding resilience in a rocky US credit landscape
There’s little doubt that the dynamics shaping the outlook for the US economy are making it difficult for fixed income investors to find resilient and diversified returns.
Threats are coming from multiple sources. A swift decline in payroll growth has set off alarm bells, while lower income consumers remain under duress. The recent bankruptcies of Tricolor and First Brands have added to the concerns. Plus, the housing market is showing signs of cracking as prices start to come under pressure.
Further, despite current weakness in the US dollar (USD), we believe there is potential for continued decline. Fanning these fears are trends like the politicisation of the US Federal Reserve (Fed), a lack of checks and balances in the current administration, and policies that seemingly encourage a weak USD.
Yet there is a staunchness among risk assets regardless of growing signs of vulnerability. Even with so many macro risks, we cannot ignore certain asset class-specific tailwinds underpinning current valuations.
This contrasting picture reinforces the importance of diversification in the current environment. What does it mean for US credit? In short, it should generate interest in some US securitised assets – particularly collateralised loan obligation (CLO) structures and agency mortgage-backed securities (MBS) – plus emerging markets, shorter-dated high yield (HY) bonds and subordinated bank debt.
Multi-layered market drivers
Decoding today’s US credit market is no easy task. Notably, we identify five forces which investors need to consider when making any allocation:
- Refinancing risk – Following a wave of bond issuance when rates were much lower, a large wall of corporate debt is due to mature in 2026. If companies look to refinance at higher rates, their cost of capital could materially increase, potentially pressurising weaker credits.
- Tight spreads, valuation risk – Despite credit spreads being historically tight, investor risk appetite is high, leading to risk premia becoming compressed at a time also when macro risks might create uneven vulnerabilities. Saying that, we believe absolute yields remain attractive, especially in the HY space.
- Supply risk – Although some commentators expect issuance levels to remain elevated for the time being, an influx of leveraged or lower-rated supply has the potential to put pressure on spreads if demand softens.
- Rising risk sentiment – Some more recent evidence of spread widening could be a sign that markets are becoming more sensitive to macro shocks, with tail risks such as geopolitical tension, volatile trade policy and liquidity shocks offering tests for credit.
- Structural shifts – The growing trend of companies issuing debt to fund large-scale artificial intelligence (AI) related infrastructure is creating higher concentration risk. This poses a heightened credit risk if AI-funded investments don’t pay off, or return on capex lags.
Being more selective
Against the current macro and market backdrop, investors are still seeking opportunities in US credit.
Among higher-quality corporates, for example, margins remain healthy as management teams have proven adept at preserving profitability amid shifting policy. This bodes well for investment grade (IG) credit, especially since a significant number of US-listed companies continue, encouragingly, to upgrade earnings guidance. In turn, many analysts have similarly revised S&P 500 earnings estimates higher for the next 12 months.
Corporate fundamentals also appear firm in the higher-quality segments of US HY, with net leverage ratios roughly on par with the lowest-rated cohorts in IG credit.
Certain sectors are set to benefit, including banking, which has been performing well on the back of substantial industry profits from high yields and offloading ‘riskier’ assets to private credit markets.
At the same time, however, the risk the US economy is nearing a technical inflection point is also rising. Deteriorating labour market data and declining all-in yields in the wake of the Fed’s dovish stance are potentially just the beginning. Should downward pressure on yields continue, we could see some erosion in the insatiable demand for credit that has dominated the past few years.
When viewed alongside a recent resurgence in strategic, multi-billion dollar M&A activity, the supply and demand sides of the equation for credit could be under threat. That would likely limit the potential for further spread compression in the coming months.
Will all-in yields continue to decline, weakening demand technicals?
Source: Bloomberg, L&G - Asset Management, Americas, as of October 10th, 2025
Emerging sources of resilience
We see two key areas of the US credit landscape where we believe investors in Asia can turn for resilience and diversification.
Firstly, subordinated bonds. These often offer a premium over senior debt when base rates are elevated. And with higher yields, that premium becomes more valuable and investors chasing yield can look further down the capital structure to lock in a higher yield now.
In particular, subordinated bonds/hybrids often behave differently than senior unsecured bonds or purely HY debt, since they can provide a mix of income and a measure of sensitivity to credit conditions while potentially offering higher returns than senior bonds.
Secondly, certain securitised assets potentially offer compelling value relative to corporate debt.
For example, agency MBS spreads over both Treasuries and corporate credit have widened significantly in recent times, offering investors a better yield premium for taking on the risks specific to securitised products. Also, option-adjusted spreads for agency MBS are elevated.
Notably, there is low prepayment / refinancing risk since many existing mortgage holders locked in much lower rates (pre-2022) than what current mortgages offer, reducing incentives for borrowers to refinance. That stabilises expected returns.
With corporate bond spreads being tight, especially in high-quality IG, securitised bonds in many cases offer more ‘bang for buck’ – so they appeal to yield-seeking investors. Plus, agency MBS are fairly liquid, large in market size and considered relatively safe.
Capitalising on AI-led demand
In addition, the impact of the capex build-out to support the AI theme is also being felt in fixed income markets.
For example, data centre asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) have emerged as key sources of capital for data centre developers and operators by providing relatively inexpensive and long-term funding for their stabilised assets.
Given institutional investors’ desire for higher-quality and longer-dated paper, issuers have leaned into this demand.
US data centre securitisation issuance volume
We believe data centre ABS/CMBS offers compelling value relative to corporate debt and other securitised products – especially deals backed by operators with scale and history, and involving assets with desirable characteristics such as location and connectivity.
In fact, focusing on good providers with strong credit metrics in the space is, in our view, increasingly important. With expectations of significant issuance in 2026 to fund data centres from all corners of the capital markets – including private credit, corporate debt and securitised products – concerns emerging about the risk of this will weigh on spreads.
Honing in on diversified credit
Greater institutional demand for securitised products broadly reflects the trend of investors chasing yield and seeking asset diversification.
Put simply, diversified pools of loans and structural credit enhancements can help provide more insulation from defaults or losses than pure corporate debt of similar ratings, plus securitised bonds have shorter durations.
This also requires track record and experience in identifying sectors and assets with the potential to outperform the benchmark on a gross and net basis.
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About the authors
Ben
Ben joined L&G’s London team in 2008, initially focusing on credit strategy before taking on the role of Head of Investment Strategy and Research, coordinating L&G’s research from long-term themes to short term market drivers. He also chaired the monthly investment macro meeting for many years, a key input for portfolio risk across the active strategies. He relocated to Hong Kong in 2020, joining the Legal & General Investment Management Asia Limited's Board as a Director and was appointed Head of Investment Strategy, Asia to help grow L&G-Asset Management’s investment business across the APAC region. Ben started his career in 1999 as a credit strategist at Dresdner Kleinwort Benson in London, before performing the same role at both BNP Paribas and Lehman Brothers. He holds a Master of Arts in Mathematics from Queens' College, Cambridge University.
Jason
Jason leads the US Investment team which spans the active fixed income, fixed income solutions, equity solutions and multi-asset businesses. His remit covers all aspects of investments from research analysis to portfolio construction and works closely with other global teams to ensure consistency and best practice. Jason is also a member of L&G – Asset Management, America’s Executive Committee. Jason joined the firm in 2015 as Senior Portfolio Manager and Fixed Income Strategist, becoming Deputy Head of US Fixed Income in December 2021. In January 2023 he was appointed US Chief Investment Officer before taking on his current role in April 2024. Prior to joining the Fixed Income Portfolio Management team, Jason spent ten years at Citigroup where his most recent position was Director, Head of US High Grade Credit Strategy where he advised institutional clients and published credit research reports. Jason earned a BS in Physics, a BS in Applied Mathematics and a BA in Humanities from Seattle University. In addition, he has a MS in Financial Engineering from University of California, Berkeley. He holds a Series 3 license registered with the NFA..
About L&G
Established in 1836, L&G is one of the UK's leading financial services groups and a major global investor, with US$1.533 trillion in total assets under management of which 43% (US$654 billion) is international (Source: L&G, global AUM as at 30 June 2025. Excludes assets managed by associates (Pemberton, NTR, BTR). The AUM includes the value of securities and derivatives positions and may not total due to rounding). L&G's Asset Management business is a major global investor across public and private markets. Our clients include individual savers, pension scheme members and global institutions, who invest alongside L&G’s own balance sheet. Our ambition is to be a leading global investor, innovating to solve complex challenges for our clients using the power of L&G. This is rooted in our investment philosophy and processes, which are focused on creating value over the long term.
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