On the surface, little about credit markets today looks dramatic. Within a persistently resilient economy, broad indexes are orderly, volatility is contained, capital markets are functioning smoothly, and liquidity prevails as the financial system continues to absorb large flows and position unwinds in various parts of the market.¹

But dig down a level and the picture looks very different. Dispersion across companies, sectors and ratings has widened materially. As shown in the chart, the Cboe S&P 500 Dispersion Index (DSPX), a forward-looking measure of expected dispersion among S&P 500 constituents, is elevated relative to its history even as the Cboe Volatility Index (VIX) remains comparatively subdued. Expressed differently, the volatility of individual companies increasingly looks much higher than the volatility implied by the index itself.

Low index volatility does not mean little is happening. It can mean a lot is happening beneath the surface. The unusually wide gap between constituent dispersion and aggregate volatility is important because it increases the scope for security selection to be impactful, even when the overall market appears remarkably calm. This improved risk-reward dynamic may warrant selectively adding exposure, increasing portfolio yield and deploying capital where spreads, fundamentals and volatility offer more compelling opportunities.

To us, the opportunity set for allocators today appears to be in extending toward structural credit where potential returns can be enhanced by origination, collateral, documentation, control and complexity rather than by corporate beta alone, as is often the case in more traditional private credit exposures.

In markets such as today’s, where abundant liquidity can mask underlying dispersion, active investment selection and risk mitigation may become increasingly critical drivers of long-term outcomes.

Credit markets continue to offer attractive yields, but the amount of compensation investors are receiving for taking credit risk varies widely by sector.¹ In many higher-quality areas, yields remain elevated while spreads are still historically tight, suggesting that strong income does not always come with equally attractive credit spreads.

Investment grade corporates illustrate this dynamic with yields remaining around 5.5%, while spreads of roughly 77 basis points (bps) sit near the bottom of their 20-year range. A similar pattern can be seen in broader high yield, where yield is approximately 7.3% but spreads continue to tighten by over 18 bps over the past month.²

Lower-quality high yield stands apart. CCC rated corporate spreads widened by approximately 101 bps over the past three months to roughly 846 bps, while yield has risen to about 13%. Unlike much of the credit market, CCC spreads are closer to the middle of their historical range along with historically high yield, reflecting greater compensation for taking incremental credit risk.³

Leveraged loans also continue to offer notable income, yielding roughly 9.0% and spreads tightening over the past month to around 530 bps. Loan spreads sit near the middle of their 20-year range, contrasting with the historically tight spreads seen across many bond sectors.⁴

Municipals present another area of divergence. Investment grade municipal yields remain elevated relative to history, while spreads widened by roughly 35 bps over the past three months.⁵

Overall, we believe yields remain compelling across credit markets, but spread levels vary significantly by sector. In our view, this reinforces the importance of being selective when taking on credit risk.