The Credit race tightens: HY, Loans > IG, PC

Research evidence excerpt

The Credit race tightens: HY, Loans > IG, PC

HY positioned well, Loans gaining

Last couple of weeks have seen a string of unfavorable economic and geopolitical events

stacking up the odds against credit. Resilient consumer spending, firm labor market, and

continued hawkish Fed rhetoric have increased the likelihood that policy remains

restrictive for longer. Renewed Iran tensions have reintroduced oil-driven inflation risk,

complicating the soft-landing narrative. In addition, amid hyperscaler “oversupply” and

increasing competition, investors have become increasingly sensitive to AI-driven supply,

questioning whether future ROI exists to justify their scale of investment.

Yet LevFin yields remain wrapped around 7%, with spreads near tights and mostly

reacting to gyrations in rates. A primary driver of LevFin strength has been technicals-

with aggregate demand net supply well in positive territory. For HY we have seen supply

rise a tad faster than demand YTD, softening technicals, though demand net supply

remains anchored near zero (Exhibit 1). In Loans, which have not seen any meaningful AI-

linked index-eligible issuance yet, supply has fallen faster than demand, strengthening

technicals further, which along with growth green shoots has helped Loans outperform

across credit MTD.

We expect LevFin AI-linked issuance to come at a similar pace as 1H, but at the cost of

other forms of new money (M&A, LBOs), not in addition to them. As such our gross

issuance forecast remains unchanged, which combined with the demand picture should

keep LevFin spreads supported, all things equal.

Exhibit 1: Loan technicals are improving, HY remains stable, while IG absorbs surge in issuance

IG, HY and BSL LTM Demand net Supply

350 IG LTM Demand net Supply HY LTM Demand net Supply