If interest rates go up, economic growth becomes strained and business conditions worsen, stress on the corporate bond and private credit markets will increase. Yet the response to this strain on the market has been orderly – surprisingly for many observers – in response to the Iran war, and its impact on inflation. With the apparent stress in the real world not apparent in the market, the question for credit traders and investors is what will give.
At the start of 2026 the bond market was on reasonably firm foundations. However, with the economic pressure from the Ukraine war, very toppy equity markets based on questionable valuations from AI infrastructure providers, and a Us administration willing to make globally significant economic decisions based upon personal whims, there are plenty of real world reasons putting pressure on investor confidence.
Nicholas Elfner, head of research at Breckinridge Capital Advisors noted in January that investment grade (IG) corporate bond spreads ended 2025 with total return on IG credit finishing north of 7.5% for the year, and a further 5% expected in 2026.
“As we enter 2026, we are of the view that the next 12 months may be more about total return and less about excess return,” he noted.
American Century Investments (ACI) reported that the Sherman Ratio at the end of 2025 was 70 bps, meaning that credit spreads or yields would have to increase that much before 12-month returns decline.
“A scenario our research currently suggests is unlikely,” Jason Greenblath, senior portfolio manager and director of Corporate Credit Research for American Century Investments, noted at the end of February 2026.
The market faced a more turbulent ride as the quarter progressed, shaped by geopolitical shocks, tariff noise and persistent questions over the inflation and rate outlook.
The market was also projecting gross investment-grade issuance to top $2 trillion in 2026, up from $1.7 trillion in 2025, driven significantly by M&A financing and capital expenditure from large technology companies.
That projection has certainly been supported by growth levels in Q1 issuance. SIFMA data shows year-to-date 2026 issuance through March of $775.2 billion, which was up 15.6% year-on-year, with average daily trading volume of $71.4 billion, itself up 17.2% on the same period last year.
During Q1, inflation fears dominated as the outbreak of conflict in the Middle East sent energy prices sharply higher and created uncertainty over central bank policy. The yield on the US 10-year Treasury finished the quarter at 4.3%, up from 4.2% at the start of the year, and many major bond categories lost ground. The US investment grade spread widened to around 1.20 percentage points and the high yield spread moved out to 4.61 points in response. Despite this credit markets remained relatively orderly compared to the sharp sell-off seen after the April 2025 tariff shock, and confidence rebounded.
“Investors exited Treasuries as the Iran conflict increased uncertainty, but primary dealer holdings show other investors are now becoming increasingly confident re-engaging in the belly,” wrote Morgan Stanley analysts on 10 April 2026.
Despite overall credit market stability remained fairly stable overall but showed differences across segments — spreads for investment-grade and high-yield bonds stayed near historical norms, supported by resilient investor appetite for yield, while leveraged loan and private dealmaking activity declined from earlier peaks.
In these markets liquidity conditions have remained resilient. Wall Street banks largely reported very positive fixed income trading revenues for the quarter, reflecting a ‘Goldilocks’ level of volatility which created more opportunity than risk. JP Morgan, Citi and Morgan Stanley all delivered strong results, while Goldman Sachs’s and Bank of America’s FICC revenues were less flattering.
So where is the risk? Warning on Federal Reserve data, which shows average hedge fund leverage is currently about 10x, and that can rise to 12x for the largest funds, S&P Global analysts noted on 16 April 2026, “This is the highest leverage in years and coincides with significantly elevated asset prices across public and private markets after a year of rising volatility.”
The potential for a market dislocation due to a US policy change is possible, and with two ongoing wars involving multiple nuclear powers, expectation of energy shocks yet to be reflected in market activity and concern around central bank independence in the US still ongoing, all of the ingredients exist for a major problem are in play.
Looking ahead, the market heads into Q2 caught between sticky inflation fears on one side and slowing growth concerns on the other, with spreads having widened from their historic lows but not yet signalling outright recession risk. So nothing gives – yet.
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