Article by Karl Falzon
Corporate credit has begun the year in line with its robust performance of 2025. Last year global corporate bond markets delivered solid returns, driven by declining yields and tightening spreads. Investor sentiment and market dynamics remain supportive, with substantial supply being absorbed by buoyant demand. Given such trends, it is reasonable to question whether rich valuations and historically low spreads have gone too far, and to what extent credit remains attractive.
At the underlying level, it is relevant to assess prospects for key interest rates and benchmark yields. Last week the US Federal Reserve (“the Fed”) left interest rates unchanged (target range of 3.50%- 3.75%). The Fed is expected to maintain a cautious stance, with Fed Chair Powell noting that “upside risks to inflation and the downside risks to employment have diminished”. The European Central Bank (“ECB”) is also expected to maintain its deposit rate unchanged, at 2%, on Thursday. Economic signals have been mostly resilient, whilst inflation has dipped below target. Recent strength in the EURUSD currency could help restrain inflation by lowering import prices, but also dampen growth. Officials have hinted that currency is a factor that can guide the ECB’s policy.
Therefore, current policy stances in key markets would point towards, at the least, a supportive scenario for corporate credit. However, it is also noted that benchmark yields have still been trading at relatively elevated levels in recent periods. The market is vulnerable to fiscal concerns and shifts in inflation. Turmoil in Japan’s bond markets is having a global impact. In the US, expectations are for the incoming Fed Chair to result in higher long-term yields and a steeper yield curve. High benchmark yields, or even volatility spikes, are detrimental to corporate bond markets, particularly within the context of very tight spreads.
There are other trends, or potential developments, that are attracting attention as possible negative catalysts in credit markets. One concern relates to the capacity of the market to absorb the ongoing increase in debt funding driven by corporates’ capital investments in Artificial Intelligence (“AI”). As corporations ramp up investments in AI infrastructure, they will be issuing increasing amounts of corporate bonds to fund such outlays, which in turn could put further pressure on the already high supply and tight spreads. It may be recalled that one of the few recent risk-off episodes last year was due to a surge in such activity that spooked investors.
However, most analysts are of the view that markets should be able to absorb the expected increase in AI-related offerings. After the brief jolt towards the end of 2025, the market regained stability and spreads reverted to sanguine levels. This week’s Oracle Corporation (“Oracle”) US$20-25 billion bond offering, intended to fund AI infrastructure, is attracting very healthy demand. Media reports are indicating orders in excess of US$126 billion.
On the other hand, it is also noted that Oracle “sweetened” the transaction by announcing it will also raise as much as US$20 billion in equity (and equity-linked) instruments, dispelling concerns on its commitment towards its investment grade rating. More generally, whilst US technology does not historically account for a major proportion of global corporate debt markets, investors should not underestimate the potential risk of contagion in the event of disruption within this space.
Another segment of the market that is often mentioned as a concern relates to private credit. The distress at auto parts operator First Brand Group last September briefly shook fixed income markets, with JPMorgan CEO Jamie Dimon notably warning that “when you see one cockroach, there are probably more”. Low liquidity and transparency, loose lending standards, and high borrowing costs are noted as some of the risks. Capital has continued to flow into private credit, as such funds have become a major source of finance in particular for mid-sized companies, and on the demand side this asset class has become increasingly “mainstream” for investors such as pension funds and insurance companies. Any major deterioration in private credit will also pose systemic risk.
On balance, global credit markets are likely to remain relatively attractive in the medium term. The resilient economic backdrop, mostly accommodative interest rates and strong market technicals, are supportive. However, this is also a “late cycle” environment that would typically justify the management of expectations in terms of additional returns.
Karl Falzon is head of capital markets at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd, with registered address Finance House, Princess Elizabeth Street, Ta Xbiex, Malta XBX 1102, is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.