Against a backdrop of tight credit spreads, strong demand for fixed income, and the growing role of artificial intelligence as an investment driver, Christopher Hult, portfolio manager of the CT (Lux) Credit Opportunities Fund at Columbia Threadneedle Investments, discusses the key opportunities and risks he currently sees in credit markets. Hult maintains a defensive positioning focused on high-quality issuers, identifies the automotive sector as one of the market’s most vulnerable areas, and argues that active management is particularly valuable in today’s volatile environment. He also examines how AI-driven capital spending is reshaping corporate financing needs, highlights opportunities in the utilities sector, and shares his views on the evolution of private credit.
How do you view valuations today? Where do you see the most attractive opportunities?
Credit valuations have been elevated for some time, but we believe they are fully justified. Corporate fundamentals remain strong, earnings growth has been impressive, and the macroeconomic backdrop has consistently delivered positive growth. Demand for credit is insatiable.
One consequence of tighter spreads is reduced dispersion in returns. The additional compensation available for more cyclical issuers has narrowed considerably. Spreads may remain tight for an extended period, so we do not want to position ourselves aggressively against the market. However, because we are no longer being adequately compensated for taking cyclical or lower-quality credit risk, we maintain a defensive bias focused on higher-quality issuers.
Is there a sector that appears particularly vulnerable?
The automotive sector. This year the industry is facing a changing regulatory environment as governments roll back some of their commitments related to electric vehicles and climate policy. As a result, what was already a significant capital expenditure cycle is being extended.
Manufacturers must now maintain expensive parallel investment programs: continuing to develop electric vehicle platforms, battery systems, and software while also investing in traditional internal combustion engines and hybrid technologies. This prevents the capital efficiency gains that would come from focusing on a single technology.
At the same time, competition from Chinese manufacturers is putting additional pressure on margins. Given these dynamics, we prefer to remain underweight the sector.
Following the sharp interest rate hikes of 2022, global fixed income has staged a strong recovery with attractive real yields. Is this still a favorable environment for buy-and-hold portfolios? How are your clients positioning their portfolios?
All-in yields remain attractive across fixed income markets, and we continue to see strong interest from a broad range of investors.
That said, we expect market volatility to persist. This is an environment that requires careful investing and agile decision-making, which strengthens the case for active management.
We believe the term premium has not yet fully adjusted, so we favor shorter maturities while looking for opportunities to increase inflation protection.
Fixed income investors have been closely watching the wave of AI-related bond issuance. Do you find these hyperscaler bond offerings attractive? How are you gaining AI exposure through fixed income investments?
As artificial intelligence applications continue to proliferate, the race to build the infrastructure supporting them has triggered one of the largest capital investment cycles in recent history.
We estimate cumulative investment needs between 2025 and 2030 will approach $6 trillion. This enormous buildout is creating unprecedented financing requirements. While the major technology companies generate significant operating cash flow, the scale of the investments required is leading them to explore multiple financing sources.
In the public credit markets, technology companies are issuing increasing amounts of debt, although index concentration and risk premiums are also rising. Given the hyperscalers’ high credit quality, the issuance itself is not a credit concern. The real question is whether the market is large enough to absorb the supply and what level of concession investors will require.
We entered this period underweight technology but have gradually increased our exposure over the past nine months, as sector spreads have repriced relative to the broader market. Even so, we will remain nimble and reduce exposure if we believe investors are no longer being adequately compensated for the continued supply likely to reach the market.
What other themes are you identifying within the investment grade fixed income universe?
The adoption of artificial intelligence technologies will affect many sectors, particularly electric utilities and power grids, given the rapidly growing demand for electricity generation. We see significant opportunities in this area.
Utilities’ capital investments generally translate into growth in their regulated asset base. This allows companies to earn higher regulated returns across their customer base under existing regulatory frameworks. As a result, their cash flow profiles should remain resilient regardless of how the AI industry ultimately develops.
In addition, utilities have the ability to issue hybrid debt, enabling them to raise capital while preserving their existing credit ratings. At the same time, the structural features of hybrid securities—including subordination, call optionality, and coupon deferral—offer higher yields, creating attractive investment opportunities.
We are also closely monitoring the rapid growth of private credit. Although public and private markets generally finance different segments of the economy, we remain alert to any spillover effects stemming from negative developments in private credit.
Ultimately, we do not believe private credit represents a systemic risk to the financial system, given banks’ limited exposure to leveraged private credit funds and the fact that the investor base is primarily institutional with long-term investment horizons.
Nevertheless, to mitigate potential contagion risks, we have made it standard practice to gradually take profits on our exposure to U.S. bank credit while identifying opportunities to rotate toward European financial institutions.
With inflation concerns rising due to the war with Iran and the disruption of shipping through the Strait of Hormuz, what is your macroeconomic outlook for the second half of 2026? What do you expect from the Fed and the ECB?
The European Central Bank has raised interest rates because inflation has moved above its target. This comes despite the fact that tighter monetary policy could further weaken growth prospects, which have already deteriorated due to the consequences of the conflict in the Persian Gulf.
The ECB hopes that this single rate increase will allow it to preserve its inflation-fighting credibility while buying time for the conflict to end and maritime traffic to return to normal.
Before the conflict, the ECB had become the envy of many developed-market central banks after successfully bringing inflation back to target while gradually lowering rates toward what it considered a neutral policy stance. However, if the conflict drags on, it may be forced into additional rate hikes as inflationary pressures increase.
Being constrained by a single policy mandate raises the risk of repeating the mistakes of 2008 and 2011, when rate hikes driven by higher energy prices ultimately had to be quickly reversed.
The Federal Reserve enjoys greater flexibility, partly because of its dual mandate of employment and inflation. Even so, the market is now pricing in a Fed rate hike before the end of the year.
By Beatriz Zúñiga