Credit Barometer: Selectivity Remains Key

Credit markets continue to offer supportive income opportunities, though the combination of tight spreads and increased price sensitivity suggests investors may not be fully accounting for underlying credit risk. As in recent months, yield movements across most sectors were modest, with a few notable exceptions.

Municipal bonds currently remain a standout, extending the trend seen last month as yields remain elevated relative to their historical averages. Investment grade munis’ tax-equivalent yield edged down slightly to 5.7% but remains comfortably above long-term averages.¹ High yield munis also saw yields drift modestly lower, while short duration HY munis were relatively stable, reflecting the sector’s resilience on a tax-adjusted basis.

Across the broader credit landscape, monthly changes were limited. US Treasuries continue to offer unusually high income relative to their 20-year history, while private credit (10.1% yield-to-worst) and CCC rated corporate bonds (10.0%) once again delivered the highest absolute yields.²

Spreads remain tight, even after modest widening in November, leaving a thinner buffer should market volatility rise. With spreads currently sitting below volatility-implied fair-value levels, price sensitivity remains an important consideration. Overall, while current yields remain constructive, tight spreads and elevated volatility underscore the need for selectivity. Municipals, especially investment grade munis, continue to offer what we consider compelling after-tax income and remain one of the more attractive segments within today’s credit landscape.