Q&A: Investigating today’s credit opportunities

Having been investing in credit markets for over a century, Aberdeen’s long heritage has helped shape our broad credit expertise while contributing to our deep understanding of global fixed income markets. 

Our Global Head of Fixed Income Jonathan Mondillo helps to provide clarity for investors by exploring the opportunities, risks, innovations, and trends in credit investing today.

Let’s begin with monetary policy …

What's the outlook for interest rates?

JM: It’s been a bit of a 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, possibly more time 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.

Where do you believe are the best credit opportunities right now?

JM: We believe 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 of 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. However, a severe 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 one of the top-performing 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-dollarization 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.

What do you believe are the risks for credit over the next 12 months?

JM: We would highlight three broad areas of risk:

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 most institutional portfolios, we’re also seeing this increasingly in wholesale portfolios too. 

This makes sense because private credit offers a unique combination of investor benefits, including higher yields and exposure to a more diverse range of issuers. This helps diversification.

Of course, the higher yield feature of private credit tends to be mainly compensation for reduced liquidity, since this type of debt is not as actively traded as public debt. So, this is a risk factor that investors really need to understand about this asset class.

Another notable aspect of private credit is generally less widely available information regarding borrowers. This includes in some instances a lack of publicly available 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 research credit research capabilities.

What’s your take on bond exchange-traded funds (ETFs) and other passive bond products?

JM: We believe 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 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. This can be explained by various structural factors, including generally less liquidity, more fragmented markets and the greater involvement of non-economic participants. And these kinds of structural inefficiencies create opportunities for skilled managers to outperform.

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, such as in the municipal bond space.

Are you seeing any other interesting trends in the market?

JM: We believe that 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 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 and short-dated municipal debt.

We believe private credit is a major investment growth area, which, as discussed earlier, offers clients the potential for higher yields and improved diversification. A growing trend is the combination of both public credit and private credit which we think makes a lot of sense for some investors. Those investors benefit from the liquidity offered from the public markets allocation along with higher yield from illiquid allocation.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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