Back to basics – What is credit? Back to basics – What is credit?

We’ve spent nearly two decades on this blog exploring the economic outlook, and history shows that this is especially relevant for active bond managers. Currently, risk markets are priced for a benign economic scenario. Credit spreads are historically tight, equity valuations are elevated, and interest rates are on a downward path as central banks unwind tight monetary policies to keep growth on track. The global economy appears healthy, and markets seem to have rediscovered their appetite for risk. But as always, we believe it’s worthwhile…

The US dollar has long held its position as the world’s dominant reserve currency, underpinning global trade and serving as a safe haven during periods of financial stress. This stability provided emerging markets (EM) with a reliable anchor for external borrowing, with the modern EM debt market beginning to take shape following the introduction of Brady bonds in 1989.

Popularised after the Second World War, the idea of the American Dream has long centred around the idea that anyone, from any background in the United States, can achieve prosperity and success. For nearly 75 years, this idea has often been symbolically represented by a middle-class family with two dogs, two kids, an American-made car and a suburban home with a white picket fence. While the “Modern American Dream” continues to include pets and children (increasingly more pets than children) and an automobile (now more evenly split between American pickup trucks, electric vehicles, and various international brands), one piece of this dream is becoming increasingly unattainable for the average American: owning a home.

We’ve all heard the arguments – “AI will supercharge the economy!” versus “No, AI is going to steal all our jobs!” The reality lies somewhere in between. Generative AI1 is a powerful tool that will boost productivity, but it won’t trigger mass unemployment overnight, and it certainly isn’t Skynet (if you know, you know). The International Monetary Fund (IMF) estimates that “AI will affect almost 40% of jobs around the world, replacing some and complementing others”. In practice, that means a large portion of workers will see some tasks automated by AI, but not necessarily lose their entire job. However, even jobs heavily exposed to AI still require human-only inputs and oversight: AI might draft a report, but you’ll still need someone to fine-tune the ideas and make the decisions.

Tariff headlines are designed to provoke and grab attention, with striking percentages quoted that appear to signal President Trump’s latest stance, framing the narrative around which country stands to win, and which to lose.

On the news of the Oasis reunion almost a year ago, my colleague Joe Sullivan-Bissett previewed the tour with some interesting historical analysis around Oasis and periods of volatility. Roughly 12 months on, I can confirm that Wednesday 30th July 2025 was the best night of my life, being one of the lucky thousands to see Oasis perform at Wembley Stadium. As I reflect on the two hours of back-to-back bangers, I realise the subtle references to credit markets that lie within the songs.

I did an MBA at Chicago Booth in 2006-08 and was lucky enough to attend the classes of three professors who later won the Nobel Prize in Economic Science: Eugene Fama (2013), Richard Thaler (2017) and Douglas Diamond (2022).
Interestingly, Fama and Thaler both won the award, but with contrasting theories. Fama won the award for his efficient market hypothesis, which suggests that stock prices reflect all available information, making it difficult to consistently outperform the market.

Following the global financial crisis, markets appear to react to any macro wobble with a “shoot first, ask questions later” attitude when it came to both banks’ credit and equity prices. From many perspectives, whether it be earnings volatility, balance sheet dynamics, or the quantum and quality of capital, banks have undergone significant transformation and are no longer characterised by the vulnerabilities of the past. Nonetheless, a persistent investment behaviour can predispose investors to revert to outdated reactions to market stress. This behavioural inertia presents a…

The credit rating agency Moody’s introduced a pivotal change to its hybrid capital methodology back in February 2024, one that is quietly reshaping the corporate hybrid landscape. By allowing certain hybrid instruments to be rated just one notch below senior unsecured debt, Moody’s has not only recalibrated the risk-reward profile of these instruments but also catalysed structural innovation and issuance momentum across both sides of the Atlantic.

Markets are once again high on ‘hopium’. Despite a still-strong labour market, sticky inflation, and an economy that refuses to roll over, rate cut bets have surged back into vogue. The Federal Reserve might be saying “higher for longer,” but investors are dancing to a different beat. Why is the market so convinced cuts are coming when the data tells a different story?