Credit markets today: What income investors should know

Credit markets have held up through a genuinely difficult period. Corporate earnings remain broadly supportive, demand for yield is healthy, and spreads — though tight by historical standards — have not blown out despite geopolitical shocks, renewed inflation concerns, and pockets of stress in private credit.

But tight spreads in a volatile environment do not mean risk has diminished. They often mean risk has become harder to see.

“The headline picture is one of resilience,” says the Robeco Credit Income team. “But that surface-level stability can obscure what is happening in the underlying structure of the market.” Endowus spoke with Robeco’s credit team about what they are observing, how artificial intelligence (AI) is reshaping bond fundamentals, and why avoiding the wrong bonds may matter as much as finding the right ones.

This article was authored by Endowus in collaboration with Robeco.

The credit market today: resilience on the surface, divergence underneath

By most headline measures, conditions look reasonable. But beneath the surface, a gradual divergence is forming between issuers, sectors, and geographies that are well-positioned and those that are not.

Spreads sit near cyclical tights, meaning markets are pricing in a benign scenario. That leaves limited buffer if growth expectations shift, inflation proves stickier than anticipated, or rates move unexpectedly. Cyclically exposed sectors — autos, consumer, and media — face margin pressure from higher input costs and weaker pricing power. Energy market disruptions and geopolitical tensions remain live sources of potential volatility.

“The next phase of this market will be less about broad directional calls and more about selectivity and risk control,” the Robeco Credit Income team notes, “as underlying vulnerabilities begin to surface in specific segments.”

When markets move broadly in one direction, the selection of individual holdings matters less. When dispersion widens, the quality of each position carries considerably more weight.

What income investors may be underestimating about AI

Much of the discussion about AI and financial markets has focused on equities — which companies benefit, which are threatened, and how to position for structural change. Credit investors have been slower to engage with the same question, and the Robeco Credit Income team regards this as a meaningful gap.

“AI is already influencing credit — but very unevenly,” the team explains.

On one side, AI supports growth and bond demand in technology and infrastructure. On the other, it creates genuine structural pressure in software and service-oriented businesses exposed to automation. In private credit, where these exposures are often concentrated, rising default risk and weaker cash flow resilience are already visible in some segments.

The subtler concern is leverage. The AI capital expenditure boom is driving higher balance-sheet pressure even among strong issuers. New bottlenecks — particularly around energy infrastructure — introduce execution and cost risks that are difficult to price in advance. Margin erosion in more vulnerable sectors tends to be gradual, often invisible in aggregate data until it is not.

This has shaped a specific allocation preference. The team has been gravitating toward businesses with hard assets and low obsolescence risk — what they call the HALO theme — which are structurally less exposed to AI-driven disruption. Recent shifts toward corporate issuers in Latin America and the United States reflect this, alongside the observation that these regions offer natural insulation from current energy supply pressures as net commodity and energy exporters.

What a contrarian approach to credit investing looks like in practice

The Robeco Credit Income strategy describes its approach as contrarian — a word that carries a specific meaning in how this portfolio is managed.

“Contrarian means being more cautious when markets look fully priced and more willing to add risk when markets dislocate and valuations improve,” the team says.

In the current environment, the cautious posture predominates. Duration sits at around 3.6 years — moderate, not extended. The focus is on investment grade and higher-quality BB-rated bonds, with limited exposure to lower-quality B and CCC segments. Current spreads, in the team’s assessment, do not adequately compensate investors for taking significant duration or lower-quality credit risk.

The contrarian posture works in both directions. During the “Liberation Day” sell-off following the announcement of reciprocal tariffs, the team added credit exposure at more attractive spreads, then reduced risk as markets recovered. A similar approach played out in 2023 during the stress in bank debt following US regional banking difficulties and the Credit Suisse situation.

Adding risk during periods of volatility and reducing it as markets recover requires a view of intrinsic value that does not shift with market sentiment, and the conviction to act against the prevailing mood at precisely the moments when it is least comfortable. The strategy operates without a hard benchmark constraint, allowing the team to allocate dynamically across investment grade, high yield, and emerging market bonds, guided by a minimum average credit quality of BB- and a defined volatility risk budget.

The Robeco team's case for issuer quality over yield

When income is the primary goal, the temptation to move toward the highest available yield is natural. In credit markets, higher yield typically reflects higher credit risk — bonds that pay more do so because investors require compensation for greater default or downgrade risk.

“Our quality bias is not about sacrificing yield — it is about protecting it over time,” the Robeco Credit Income team says.

Their argument is that investors systematically overpay for higher-risk credits when spreads are tight and memories of past losses are distant. The real driver of long-term income is not maximising yield at a given moment; it is avoiding the defaults and downgrades that erode it over time.

“Managing a corporate bond portfolio is not primarily about selecting the best bonds — it is about avoiding the losers.”

This emphasis on loss avoidance implies something specific about where the value of credit research lies: not in identifying the next great opportunity, but in systematically sidestepping issuers whose credit profiles are deteriorating before the market has priced in that outcome. The structural allocation to BBB and BB-rated bonds reflects this balance — according to Robeco, high enough in quality to limit default exposure, while still capturing meaningful income above government bonds.

Robeco has been investing in credit markets for more than 50 years, across developed and emerging markets, through multiple cycles of disruption and recovery. Its global fixed income platform comprises more than 100 professionals, combining fundamental and quantitative research with integrated environmental, social, and governance (ESG) analysis. A proprietary tool — Duration Times Spread (DTS) — supports portfolio-level credit risk measurement alongside an AI platform drawing on more than 20 years of proprietary research data.

For avoidance of doubt, the Fund does not constitute a green or ESG fund pursuant to applicable regulatory guidelines.

Investment implications

For income-focused investors in Singapore, credit can serve as a meaningful component of a diversified portfolio — but the structure of that exposure matters more in a dispersed market. A broad, undifferentiated allocation to credit may not distinguish adequately between issuers strengthened by today’s structural themes and those quietly being disrupted by them.

In our view, the case for including credit in a portfolio rests on income generation and diversification from equities. Sizing matters: credit exposure should be calibrated to an investor’s income needs, risk tolerance, and investment horizon. 

In the current environment, an approach anchored in avoiding credit deterioration may offer a more resilient foundation for income than simply seeking the highest available yield. In addition, Robeco's ex-US diversification is a potential differentiator, reflecting the distinct industry composition of European and emerging markets.

Endowus offers access to two Robeco strategies on the Fund Smart platform: the Robeco Credit Income Fund (SGD-Hedged, Dist.) and the Robeco QI Dynamic High Yield Fund (SGD-Hedged, Dist.). Speak with an Endowus adviser to understand how credit may fit your broader financial plan. 

Frequently asked questions

What is the Robeco Credit Income Fund?

The Robeco Credit Income Fund is an actively managed, multi-asset credit strategy investing across investment grade, high yield, and emerging market bonds globally. It maintains a minimum average credit quality of BB- and targets resilient income through a full credit cycle, with a quality bias and contrarian approach to positioning.

What does “contrarian” mean in the context of credit investing?

In the Robeco Credit Income strategy, contrarian means being more cautious when market spreads are tight and valuations offer limited margin for error, and being prepared to add credit exposure when spreads widen during periods of market stress. The aim is to build positions at more attractive entry points rather than following market momentum.

Why might quality matter more than yield when investing in credit?

Higher yields in credit markets typically reflect higher credit risk — bonds that pay more do so because investors require compensation for greater default or downgrade risk. A quality-focused approach prioritises avoiding defaults and credit deterioration over maximising current yield, on the basis that protecting income over time may produce better long-run outcomes than reaching for the highest yield at any given moment.

How does AI affect credit markets?

AI is influencing credit markets unevenly. It supports growth and bond demand in technology and infrastructure, while creating structural pressure in software and service businesses exposed to automation — where rising default risk and weaker cash flow are already visible in parts of private credit. For credit investors, this makes issuer and sector selectivity more important than broad market exposure.

How can I access Robeco’s credit strategies through Endowus?

The Robeco Credit Income Fund (SGD-Hedged, Dist.) and the Robeco QI Dynamic High Yield Fund (SGD-Hedged, Dist.) are both available on the Endowus Fund Smart platform at endowus.com/investment-funds-list