Rethinking global credit: Creating a new edge in a fragmented world

Has global credit become investable again? Yes, but not in the same way as before. After more than a decade in which ultra-low rates compressed yields and distorted fixed income markets, investors can once again earn meaningful income from credit. That has restored global credit’s relevance for institutional portfolios.

But this is not a simple return to the traditional fixed income playbook. The opportunity is no longer simply about accessing spread. Tight valuations, shifting correlations, geopolitical fragmentation and structural changes mean the challenge today is less whether to own global credit – it is more how to build exposure that is resilient, selective and flexible.

Since late 2022, the market has been reshaped by a higher-rate environment in which income is once again doing much of the heavy lifting. At the same time, deglobalisation, industrial policy, energy security, supply-chain realignment and AI-led disruption are creating new fault lines and opportunities across sectors and regions.

Reframing the market

One of the defining features of the current regime is the growing importance of yield in driving investor behaviour.

As shown in the chart below, yields are currently attractive relative to historical levels while spreads are tight.

_{Source: L&G, Bloomberg, based on historical yields and spreads of Global Fixed Income benchmarks represented by Bloomberg indices: US Credit IG, Euro Credit IG, Sterling Credit IG, Global High Yield, and EM USD Aggregate, as at 31 May 2026.}

Markets have repeatedly shown that even on risk-off days, demand can re-emerge quickly when all-in yields are sufficiently attractive. In that sense, yield has often trumped spread. Technical demand has at times proved more resilient than macro fundamentals might suggest, allowing credit markets to absorb shocks better than expected.

This does not mean spreads cannot widen or fundamentals no longer matter. But it does require investors to be realistic about how markets behave. When many buyers are targeting income, credit can respond differently to volatility.

For active investors, this creates both potential opportunity and risk:

• Opportunity – when markets misprice relative value across issuers, sectors and regions
• Risk – when technical demand is mistaken for stability

Understanding that balance is central to navigating today’s market.

Dispersion under the hood: where we believe opportunity exists for active credit managers

While headline global credit spreads are at historical tights, the surface-level picture risks obscuring what is happening underneath.

As the chart below illustrates, dispersion across sectors remains significant, even as overall spread levels are tight.

_{Source: L&G, Bloomberg, as at 31 May 2026. Dispersion is represented by the difference in OAS between the sectors with the widest and tightest on the last day of each calendar year.}

This is where selectivity becomes increasingly important. The opportunity today is not widespread dislocation, but the growing importance of differentiation at the margin. Issuer-, sector- and region-specific factors are beginning to matter more, even as overall spread levels remain relatively compressed.

The historical pattern reinforces this dynamic. Periods such as 2015 and 2022 highlight how dispersion can widen dramatically, but crucially, even in recent years dispersion has remained persistent. The gap between the most expensive and cheapest parts of the credit market continues to provide a meaningful opportunity set, in our view.

In this environment, we believe purely passive or broad exposure may not fully capture relative opportunities or risks. The value-add is not just to access credit beta but also identify where the market is failing to price sufficient differentiation and where relative value opportunities are emerging.

Credit’s dual role, but with a sharper focus on implementation

We believe global credit has re-established its dual role as both an income generator and a portfolio diversifier*. But when spreads are tight, the emphasis shifts. Diversification remains essential, yet alpha increasingly comes from identifying idiosyncratic opportunities rather than relying on generic carry.

The objective is not just to own more credit, but to own the ‘right’ credit – and to understand when pricing is being driven more by technicals, constraints or consensus than by fundamentals. That demands greater precision in both research and portfolio construction.

From separation to integration

The traditional separation between asset allocation and security selection is becoming less effective.

Credit, rates, liquidity and regional exposures are now deeply interconnected. Duration can cushion or amplify risk. Regional allocation affects sector exposure. Liquidity shapes both resilience and return potential. And the effectiveness of hedges depends on shifting correlations between rates and spreads.

In the past, rates could often be treated as a passive backdrop. That is no longer the case.

In a world of higher rate volatility and unstable correlations, active rates management is increasingly important, both as a source of risk mitigation and a potential driver of alpha. In some scenarios, the wrong duration stance can have a greater impact on returns than credit exposure itself.

A differentiated approach to global credit

A more effective framework therefore requires integration rather than silos. In practice, it means one integrated process for credit and rates – so allocation, security selection and duration decisions work together, within a disciplined process ensuring return drivers exhibit low correlation over time.

It also means moving beyond a binary choice between fully centralised portfolios and purely regional approaches. A hybrid model, combining local market expertise with central portfolio construction, can provide both depth of insight and coherence of execution.

This is where L&G’s approach is differentiated. By combining regional specialist teams with central oversight, and integrating active credit and active rates management, portfolios are constructed to reflect both local insight and global perspective.

The result is a more holistic process, where credit allocation, security selection and duration positioning are managed as interdependent sources of alpha, not as separate decisions.

Balancing diversification and conviction

Diversification alone is not enough. Portfolios need breadth to manage risk, but also the ability to express conviction. Local expertise helps in identifying opportunities and risks within regions, while central portfolio construction ensures those insights are reflected at the appropriate scale and in the right context.

The outcome is not diversification for its own sake, but deliberate portfolio architecture – diversified enough with the aim of cushioning against shocks but focused enough to pursue alpha where conviction is strongest.

Achieving this type of balance, in terms of being dynamic but also holistic, is especially important in today’s markets.

Persistent inefficiencies – and how to capture them

Even in tighter markets, inefficiencies persist. Markets can become subject to forecasting bias, anchored to consensus views that are slow to adjust. Further, rules-based or constrained investors – whether driven by ratings, benchmarks or yield targets – can create pricing distortions. And  geopolitical-driven volatility can obscure underlying fundamentals.

These inefficiencies are not new, but they matter more in an environment where spreads alone do not tell the full story.

Capturing them requires a process that can:

• Assess where consensus is stable or vulnerable.
• Identify where technicals are masking fundamentals.
• Respond dynamically as relative value emerges across regions and sub-asset classes.

For L&G’s global benchmarked strategies, this means drawing on multiple sources of alpha: credit allocation, security selection and active rates management. It isn’t about relying on broad beta alone. These drivers are not always correlated, strengthening the potential for consistent risk-adjusted returns.

From allocation to architecture

The implications for investors are clear. Global credit continues to offer meaningful income and diversification benefits, but the bar for implementation has risen.

We believe the next phase of the cycle will favour portfolios built through integration – combining credit and rates, regional insight and global perspective, diversification and conviction.

In that sense, the key distinction in global credit today is not between regions or asset classes, but between approaches that allocate and those that truly integrate.

Find out more about L&G's active fixed income capabilities here, and follow us on LinkedIn for our insights.

* It should be noted that diversification is no guarantee against a loss in a declining market.

_{Key risk warnings
The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not a guide to future performance. The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor’s circumstances. Any views expressed are those of L&G as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.}

_{Issued by:
Hong Kong: Legal & General Investment Management Asia Limited, a Licensed Corporation (CE Number: BBB488) regulated by the Hong Kong Securities and Futures Commission (“SFC”). This material has not been reviewed by the SFC.}

_{Singapore: LGIM Singapore Pte. Ltd (Company Registration No. 202231876W), regulated by the Monetary Authority of Singapore (“MAS”). This material has not been reviewed by the MAS.}