Credit in a volatile world - slow and steady wins the race

The month of January has been a very eventful one for markets, mostly courtesy of geopolitical events, ranging from the capture of Venezuela’s sitting president and arguably culminating in Mark Carney’s speech at Davos. The last week of the month was also characterised by sharp and historic moves in commodities after President Trump nominated Kevin Warsh as the next Fed chair. The nomination has reasserted market confidence in the Fed’s independence, at least for the time being, and has taken off the table the immediate risk of electing a candidate that would be inclined to cut rates just to follow the presidential orders. We believe it is worth pausing to highlight how the volatility in credit markets has been rather muted, despite all the headwinds, and indeed, outperformed that of equity markets.

First, we are of the view that geopolitical uncertainty remains elevated, and the US administration is unlikely to change course in the near term, nor will the world change its response towards this attitude, i.e. Mark Carney’s speech will continue to resonate with many. Leaving aside the details, we believe the markets will continue to be subject to erratic decisions from the very top, ongoing uncertainty around tariffs, and other unorthodox policy tools in the months to come. It is difficult to have a precise perspective on how the politics will evolve beyond the current term of the US president, but we do believe markets will focus on the next 6-18 months ahead of us rather than ‘what will happen’ post the 2028 US presidential elections. This tells us that investors should be prepared for continued bouts of volatility. 

Second, when it comes to credit and fixed income more broadly, we take comfort in the market’s reaction to the election of Kevin Warsh as the next Fed chair. At a time when some investors had questioned Fed independence, and the role of the government bonds in portfolios has been clearly evolving, it is reassuring to see the US administration select a candidate with a strong reputation who commands broad respect within the investment community. The battle for the Fed independence is unlikely to be over, but bond investors can rest assured that the FOMC is likely to conduct monetary policy with a focus on the macro picture rather than politics.

Third, and most importantly, we note this volatility is not entirely new. Indeed, we have seen a new level of geopolitical uncertainty emerge post the appointment of Mr. Trump as US president. With peaks and troughs, this uncertainty has largely persisted. What might be new though, is that in this latest bout of volatility in January, credit volatility has not moved at all, while that of equities and other asset classes has been much higher. We note that during this period, the technical for credit markets have remained very strong and we expect them to continue to be supportive. Clearly, should we see precipitous falls in equity markets, credit is also likely to eventually give in – as we have seen in April last year. Nevertheless, the measured volatility in the credit markets has been lower than that in equities over the last two years as one would expect, and this has been accompanied by handsome returns yielding attractive Sharpe ratios. As we anticipate geopolitical volatility to continue, we think the risk return profile of credit still looks very reasonable despite valuations across most asset classes having compressed as a result of the rally.

To sum up, we have seen a very eventful start to 2026 and we expect that the reminder of the year will not be very different, given the number of geopolitical events at play.  Volatility in credit has remained subdued – compared to the equity markets and more recently commodities – and we see the asset class as weathering broader uncertainty favourably. Headline returns have been lower than those in equities or some commodities, but on a risk-adjusted basis, credit has delivered very attractive returns. Ultimately, we believe that in these uncertain times, slow and steady wins the race.