What are the key opportunities and trends in credit investing today?

What are the opportunities, risks, innovations and trends in credit investing today? Read this interview with our Global Head of Fixed Income Jonathan Mondillo to find out. 

Q) Let’s begin with US and UK monetary policy. What's the outlook for interest rates?

JM: It’s been a bit stop-start over the past couple of years, but the overall trend for policy interest rates remains downwards. We expect the Federal Reserve to cut rates one or two more times in 2025, followed by three to four more cuts in 2026. This reflects a backdrop of slowing inflation, weaker jobs data, and political pressure to support growth. 

Q) Where are the best credit opportunities right now?

JM: We think there are a number of potential opportunities to consider, depending on investor risk appetite.

Historically, a slow (but still positive) growth environment, as we have today, has tended to be supportive for corporate credit. Although credit spreads are compressed, all-in yields are still attractive compared to history. At the same time, corporate fundamentals are robust, with good profitability, low leverage and good interest coverage.

In the event of a more pronounced slowdown, being higher up in terms of credit quality would be sensible. We especially like investment-grade short-dated credit at present owing to its attractive long-term risk-adjusted returns and low volatility that may appeal particularly to more risk-conscious investors. This being said, a severe economic slowdown, or even worse, recession, is by no means our base case. In fact, selectivity is key because even in tougher economic conditions, some higher quality high-yield names can be attractive.

Elsewhere, investor interest in emerging market debt (EMD) remains strong. This year, we’ve seen quite a significant weakening of the US dollar. Naturally, this has helped local currency emerging market debt, which is the top-performing EMD segment in 2025 so far.

Another area that is seeing good traction is frontier bonds. Here, as ever, higher yields come with extra risk, but the de-dollarisation trend has been helpful. In addition, it seems that investors are concluding that some frontier names could be relatively well insulated from tariff-related headwinds. 

Q) What are the risks for credit over the next 12 months?

JM: We would highlight three broad areas of risk.

Firstly, there are geopolitical tensions, especially the ongoing Russia-Ukraine conflict and events in the Middle East. And there is also a geopolitical dimension to the trend of increasing global trade protectionism, which as we have already seen, has the potential to adversely impact investor sentiment. With respect to US tariffs, while there is a bit more clarity, there are still some areas of uncertainty, including the extent of the negative impact for global trade and growth.

Secondly, and more so in developed markets, including the US, UK and Europe, we’ve been seeing a tendency for increased government deficit spending. This is worth monitoring because the concern for credit investors is that the resulting increase in bond issuance could push up term premia.

Finally, a more specific or niche type area that we’re paying attention to is potentially increasing refinancing risks in the lower echelons of high yield. In particular, in recent months we’ve been seeing signs of an uptick in the issuance of so called ‘payment-in-kind’ (PIK) bonds – these are bonds that pay interest in additional bonds rather than in cash during the initial period.  

Q) What’s the role of private credit?

JM: We believe an allocation to private credit can play a valuable role in most portfolios today. Indeed, while private credit already features in some form in portfolios, we’re seeing investors looking to increase allocations into newer areas of the market such as fund finance. We are also seeing private credit allocations increasingly in wholesale portfolios too.  

This makes sense because private credit offers a unique combination of investor benefits, including higher yields, exposure to a more diverse range of issuers that helps diversification, as well as greater protections such as security.

Of course, the higher yield feature of private credit tends to be mainly compensation for reduced liquidity, since this type of debt is not actively traded like public debt. So, this is a risk factor that investors really need to understand about this asset class. Investors especially need to make sure they are being rewarded for this illiquidity, and and so a deep understanding of public as well as private credit market value is key.

Another notable aspect of private credit is generally less widely available information regarding borrowers. This includes a lack of assigned ratings from the major credit rating agencies. And as such, we think this really underscores the need for investors to look for fund providers with strong and proven in-house credit research capabilities.  

Q) What’s your take on bond Exchange-Traded Funds (ETFs) and other passive bond products?

JM: We think there's a role for both passive and active investing solutions within fixed income. Indeed, we also think there’s a role for more systematic-orientated approaches that are neither fully active nor fully passive, but which rather combine some good aspects of both.

This being said, fixed income is an asset class where historically active approaches have tended to fare relatively well, certainly compared to equities. This can be explained by various structural factors, including generally less liquidity and more fragmented markets. And these kinds of structural inefficiencies create opportunities for skilled managers to outperform. Taking our own example at Aberdeen, we are proud that 90% and 94% our active fixed income assets under management have outperformed their benchmarks over 3 and 5-years respectively [1].

With passive investing approaches, clearly the potential to outperform versus benchmarks is forgone. However, particularly in the case of ETFs, there are other advantages, such as lower costs, greater holdings transparency and more trading ease.

As such, depending on client demand, we would not be averse to exploring potential product development opportunities in the space, particularly in respect of active fixed income strategies within an ETF wrapper. 

Q) Is sustainability relevant for credit investing?

JM: In short, yes. We believe sustainability and ESG (environmental, social and governance) factors are highly relevant for credit investing.

Q) Are you seeing any other interesting trends in the market, and how is Aberdeen responding?

JM: There are several notable trends in the marketplace right now.

As discussed earlier, we’re in an environment of declining interest rates. With roughly $7 trillion ‘sitting on the sidelines’ (in cash or liquidity products), we’re seeing increased investor interest in viable ‘step-out-of-cash’ solutions. In our view, an asset class that really ticks many of the boxes in this respect is short-dated global credit – so we have created a dedicated product, our Short Dated Enhanced Income Fund, that we think really meets investor requirements in this area.

Private credit is a major investing growth area, which as discussed earlier, offers clients the potential for higher yields and improved diversification. We’ve been responding to this by expanding our offerings in this space. For example, just recently, we launched a dedicated fund finance fund, which invests in investment grade ‘subscription line facilities’, which are effectively high-quality loans to private markets funds. We think it’s a testament to our innovation capability that we can offer exposure to this niche segment in an evergreen format.

Finally, there’s growing demand for more sustainable investments, which we’ve been seeing from both our institutional and wholesale clients. As alluded to earlier, we’ve ensured ESG analysis is deeply embedded within our credit research framework. As part of this, we’ve created proprietary sustainability research frameworks and tools to ensure we’re capturing the best sustainable investment ideas for our clients.

And of course, this is a trend that also influences our product development initiatives. Some examples of our offerings in this space (which we also think are quite innovative in their own ways), are the Climate Transition Bond Fund, the Global High Yield Sustainable Bond Fund and the Emerging Markets SDG Corporate Bond Fund.