Supportive earnings and yield backdrop
The current credit environment is favourable for investors seeking yield and enhanced income potential. Corporate fundamentals remain solid and resilient, while mega-trends in technology, the global dominance of US energy and increased investment in defence are all contributing to strong forward earnings. Even lagging sectors, such as autos, are starting to stabilise.
Although corporate spreads have already tightened significantly and remain close to their all-time tights at around 110 basis points for the representative Bloomberg Multiverse Corporate Index, the strong outlook for corporate profitability, low default rates and robust demand from investors seeking credit exposure should help support credit markets despite uncertainties caused by US tariffs and the Iran conflict.
Against this backdrop, the yields on offer in corporate credit markets are looking compelling, with corporate bond yields remaining elevated even as spreads have tightened. For example, the US dollar yield-to-worst for the Bloomberg Multiverse Corporate Index, at close to 5%, provides an attractive entry point compared to most periods over the last 10 years.
Finding opportunities in extended allocations
In our JPMorgan Funds – Flexible Credit Fund, I’m able to tap into the full range of opportunities available from today’s corporate credit markets by navigating dynamically between credit allocations, depending on the macroeconomic backdrop and the team’s conviction in corporate fundamentals. Not just across investment grade, high yield and emerging market exposure, but also via extended allocations to lower tier bank capital, corporate hybrids and convertible securities. This flexibility is especially valuable in today’s fast-evolving credit markets, where traditional risk classifications based solely on credit ratings are no longer sufficient.
Some of the most interesting opportunities at the moment can be found in hybrid securities - which are bonds that combine features of both debt and equity, typically issued as subordinated structures from highly rated investment grade issuers that can trade at spreads twice as wide as their senior debt. These instruments have been a staple in the European market for years and are now rapidly gaining popularity in the US, broadening the opportunity set for flexible credit portfolios.
I’ve been particularly focused on hybrids within the utilities sector. Utility hybrids look attractive today because they combine defensive fundamentals with strong income at a time when many other spread sectors look relatively expensive. The sector is benefiting from a major structural investment cycle driven by grid upgrades, electrification, renewables and rising power demand from AI and data centres, which in turn is supporting long-term earnings growth and cashflow visibility across regulated utilities, many of which operate under inflation-linked regulatory frameworks.
Hybrids are also strategically important for issuers. Utilities need to fund large capex programmes while protecting investment grade ratings, and hybrids provide partial equity treatment from rating agencies. As a result, the market should remain deep, liquid and well supported by institutional investors. From an investor perspective, utilities hybrids continue to offer meaningful spread pickup versus senior investment grade debt, despite being backed by stable and highly defensive business models. Some of the names we favour include Veolia, EDP and Enel.
Overall, utilities hybrids offer a relatively attractive combination of defensive carry, structural growth and resilient fundamentals, particularly in an environment where macro uncertainty remains elevated. In many cases, we can access yields closer to high yield markets without taking equivalent cyclical risk. This exposure is appealing for our strategy, which seeks to deliver high-yield-like returns with lower volatility.
Actively managing credit exposure to enhance returns and manage downside risk
While the fund’s exposure to extended allocations is currently towards the higher end of its historical range, exposure to global investment grade and high yield is towards the lower end, reflecting valuation levels and the current stage in the market cycle.
Given the fund’s return objective, the portfolio maintains a material allocation to below investment grade rated bonds. The investment grade allocation is at the lower end of its range, as the need to own higher quality corporate exposure has evolved through the market cycle. The allocation to emerging market corporates, by contrast, is currently at its highest ever level, reflecting the structural improvements supporting the asset class.
I also use asset allocation decisions – in combination with rigorous risk scenario analysis and credit hedges – to manage downside risk. In past drawdowns, such as at the beginning of the Covid pandemic in 2020, or in the Ukraine invasion of 2022, this approach has helped to cushion returns.
In volatile periods, allocations to investment grade and cash holdings can be increased dynamically, while decreasing exposure to some of the higher beta sectors. The team also screens for inexpensive hedges during periods of lower volatility, typically structuring hedges to pay a premium should spreads widen significantly. Ultimately, these hedges are in place to cushion the fund on the downside in more volatile and/or extreme situations, helping to create a smoother investment journey.
Another risk management lever that I can use is interest rate duration, which tends to be managed within the intermediate 2.5yr – 5yr range to dampen volatility in the riskiest parts of our portfolio in a right-way correlation market without swamping the returns from credit. Active management of duration within this range has helped to cushion the portfolio across multiple market environments.
Currently, credit markets are demonstrating remarkable resilience, although rates continue to lag as investors grapple with questions surrounding the timing and direction of central bank policy adjustments. In this environment, my focus remains on disciplined credit selection, favouring BBBs and BBs with short duration, and maintaining active hedges to manage risk. With expected volatility set to unlock value across the corporate credit universe, I believe this diversified and flexible strategy is well positioned to capitalise on evolving market dynamics in 2026.
Core credit exposure
For investors looking to access a broad exposure to credit markets, our flexible unconstrained approach can serve as a core credit allocation in portfolios, aiming to deliver high-yield-like returns with lower volatility. Find out more about our Flexible Credit Fund >