In the view of John Lloyd, Head of Global Multisector Corporate Debt at Janus Henderson, the corporate credit market is experiencing a strong period mainly for two reasons: corporate earnings growth is solid—especially in the US—and default levels remain low. “Although spreads are historically tight, low default rates still allow for appropriate risk-adjusted pricing. However, tight valuations are forcing investors to rethink asset allocation,” he points out.
The expert considers that the asset class offering the best risk-adjusted return/volatility profile and the most potential for portfolios is corporate credit securitization, as it also provides the widest spread, particularly within the artificial intelligence (AI) sector. Regarding the outlook for higher interest rates, Lloyd views it as positive, as it enables the credit market to continue offering attractive yields. “The rise in long-term rates is driven, among other factors, by the sizable US fiscal deficit, estimated between 6% and 7% this year, creating fierce competition for capital with the private sector and AI-related issuance,” he explains.
In his opinion, another consequence of this shifting central bank outlook is that, after five years of inflation above the 2% target in the US, “investors are demanding higher real and annual rates. Flows into credit will continue to be driven primarily by absolute yield levels rather than spread widening,” he acknowledges.
The Hyperscaler Tsunami
Against this market backdrop, one of the key points highlighted by Lloyd is the massive supply of debt approaching the investment grade market to finance AI infrastructure. As he notes, corporate debt issuance is expected to exceed one trillion dollars over the next year, originating mostly from tech hyperscalers. “The tech component of the IG index is estimated to double over the next fiscal year. This huge supply has already caused hyperscalers to underperform the broader market. In light of this oversupply scenario, our strategy has remained heavily underweight in investment grade tech,” he admits.
Lloyd compares this episode to past waves of massive capital expenditure, such as the telecom spectrum rollout in the US, a period during which issuers also underperformed the index. “Spending on AI infrastructure is not a passing fad. Hyperscalers’ capex forecast will rise from over $800 billion today to $1.3 trillion by 2028, consolidating a multi-year AI investment cycle.”
Portfolio Positioning
For Lloyd, a multisector approach amplifies the benefits of active management and optimizes return per unit of volatility. Within its strategy, the firm maintains an overweight in securitized assets relative to traditional corporate debt. “Although their valuations are also tight, they offer better relative value and lower volatility per unit of spread. AAA-rated CLOs stand out, offering attractive yields—around 125 basis points in Europe compared to 80 bps for the IG index—with higher credit quality and lower volatility,” he argues.
Additionally, the portfolio maintains a short duration of between 3 and 5 years, centered at 4 years. As he explains, “this decision responds both to attractive short-to-medium-term yields and to a structural post-COVID shift. Correlations between duration and spreads have turned more positive, making duration less effective as a hedge when rates rise,” he states.
Two asset classes highlighted by the manager and included in the JH Multi-sector Income strategy are emerging market credit and high yield debt, as well as bank loans. Regarding emerging markets, he believes their fundamentals have improved, showing “more credit rating upgrades than downgrades,” while sovereign issuers “demonstrate greater fiscal discipline compared to developed market deficits.” Based on his experience, moreover, “scarce AI-linked debt issuance in emerging markets supports favorable supply-demand dynamics.”
Lastly, he notes that in the case of high yield debt, “we prefer the European loan market over the US market due to its less cyclical nature, lower software exposure, and reduced risk of AI disruption. Furthermore, euro-denominated issuance tranches offer an additional spread of 25 to 50 basis points over their dollar equivalents.”
