Short-dated credit: finding the sweet spot in a crowded market

Many popular risk-on areas – including high yield, subordinated financials and emerging market debt – enjoyed a strong run over the last 24 months.

Yet flows into fixed income markets continue apace. Large bond deals are attracting significant demand. According to JP Morgan, 2026 saw the second-largest day of corporate issuance in US history, and the biggest ever day of European issuance. Investors are still attracted to the yields on offer, which sit comfortably above the average levels of the last 20 years.

Add in the likelihood that the European Central Bank keeps rates on hold this year – alongside the potential for two further cuts in the US from a notably dovish new Federal Reserve chair – and it’s easy to see why investors remain upbeat.

The macro view: a tale of two economies

The European economy remains broadly stagnant, while the US continues to power ahead, supported by AI-related capital expenditure. Historically, low but steady growth in the 1-2% range has been an ideal environment for investment-grade credit conditions that are 'not too hot, not too cold'.

Fundamentals vary by sector but overall remain reasonable. Banks continue to perform, and sentiment is improving in areas such as real estate. Autos face clear challenges with the credit trend weakening, while chemicals and basic materials are yet to exit their downturns. Greater scrutiny is also likely across parts of the tech sector, particularly around AI delivery and funding. 

What does it mean for investors?

Credit spreads are tight and can stay tight for longer. We think spreads will remain broadly range-bound, with the potential for mild widening over the next six months. Further tightening is possible but should not be assumed.

Meanwhile, duration (sensitivity to interest rate changes) is far harder to call than it was last year. Markets have largely priced in additional US rate cuts, and our base case is for a modest further steepening of yield curves. The question becomes: how much risk is appropriate to achieve an attractive yield – and how much duration are investors prepared to take to secure it?

Enter short-dated credit

Short-dated credit continues to offer an attractive yield pick-up over cash and government bonds. Given the current environment and prevailing valuations, it remains one of the most compelling options on a risk‑adjusted basis in our view.

Our short-dated strategy has reduced exposure to high yield and increased allocations to cash and short-dated government bonds. We believe this positioning has the potential to lower overall risk while providing the firepower to act if risk sentiment wobbles in the coming months.

Within this, we continue to favour banks, utilities and telecoms, and expect senior bank debt to trade through non-financials again in the coming months. Short-dated subordinated bonds – with call dates within two years – still make sense in today’s climate. We continue to look for the best ideas across emerging markets and Asia, as well as selective low-BBB and BB-rated names to supplement yield.

The great tech sale

Tech issuance was a major theme in the final quarter of last year. UBS forecasts that US$900 billion of issuance could come from the wider sector in 2026, with roughly 60% expected in public market. These are undoubtedly large numbers, but investors have absorbed them with only brief periods of indigestion.

In recent months, high-quality issuers such as Amazon and Google have come to market with spreads around 25 basis points wider than they were trading in the second half of 2025. Our approach has been to take profits following these deals and wait for the next attractive entry point. We’ll continue to do so in the months ahead.

Final thoughts…

In a market defined by tight spreads, strong demand and shifting rate expectations, we think short‑dated credit stands out as the pragmatic choice. Resilient fundamentals, attractive yields over cash and government bonds, and selective opportunities across high‑quality issuers all strengthen the case. With disciplined positioning and ample liquidity, we believe short‑dated credit offers a smart way to remain invested – while staying ready for whatever 2026 brings.