Market Commentary

• Public credit markets — often looked at historically as a sector that provides early warnings — remain relatively calm.
• For diversified investors, “well behaved” credit markets should reinforce the value of maintaining exposure to high-quality income assets, avoiding excessive concentration, and staying focused on long-term objectives rather than short-term headlines.

Public credit markets — often looked at historically as a sector that provides early warnings — remain relatively calm. Corporate bond spreads look well contained, having widened only slightly from 15-year lows. In other words, public credit markets appear “well behaved.” We understand that when investors hear that credit spreads are “tight,” it can sound concerning, as if markets are ignoring risk. But, in our view, stable spreads reflect risk that appears contained and differentiated rather than broad and systemic.

We see markets rewarding companies with stable business models, predictable revenues, and manageable debt levels. Borrowers with weaker fundamentals are facing higher costs or reduced access to capital. We believe this selective behavior is a sign of a functioning market, not an overheated one. For investors, this reinforces an important lesson: In this environment, quality matters more than chasing yield at all costs.

We would be remiss if we didn’t mention what we are currently observing in private credit markets. We see many different factors coming together at the same time, but let us highlight two main ones. First, company valuations and loans made to companies in this sector are under scrutiny by lenders. Keep in mind that many of these companies don’t trade often (or at all) and innovation and disruption from artificial intelligence (AI) are putting many companies to the test of higher default risks. Also, we think some investors, attracted by higher yields, may not have fully considered that private credit investments are designed to be long-term and are not easy to sell quickly. As conditions have changed, it appears more investors are now looking for an exit, but because these investments do not trade often, selling takes time and often requires accepting lower prices — adding pressure to the sector.

In summary, we believe that public credit markets are signaling that large corporations with access to capital are doing fine so far. We expect them to continue to benefit from the AI infrastructure buildout and a resilient consumer. The stress we currently see in private credit seems like a “growing pain” as the sector matures and liquidity expectations reset.

Credit markets rarely command the same attention as stocks, but we believe their message can be just as important — especially in periods of heightened uncertainty. In our view, calm conditions in public credit markets suggest that portfolios do not need to be positioned defensively for systemic risk, even if volatility persists elsewhere. We believe this argues for discipline, not complacency.

For diversified investors, well-behaved credit markets should reinforce the value of maintaining exposure to high-quality income assets, avoiding excessive concentration, and staying anchored to long-term objectives rather than reacting to short-term headlines.

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