The Weekly Fix

Private credit's software problem creates a potential opportunity for high yield as exposure gaps reveal structural vulnerabilities in direct lending portfolios.

Anne Greenwood, Institutional Portfolio Manager on RBC GAM's BlueBay U.S. Fixed Income team, analyzes how AI-driven repricing may redirect capital flows across credit markets.

1. Widespread credit repricing pushes spreads to widest levels since last year, driven primarily by software sector concerns, while energy tightens on geopolitical supply pressures.
2. Direct lending holds over 30% software exposure compared to less than 4% in high yield, concentrating AI displacement risk where liquidity is most constrained and underwriting scrutiny intensifying.
3. Investors pausing private credit allocations may find natural alternatives in today's higher-quality, more liquid high yield market with minimal software sector overlap.

Corporate credit faces volatility as private credit stress rises, AI divides borrowers, and IG primary strength masks widening dispersion.

Neil Sun, Portfolio Manager on RBC GAM's BlueBay U.S. Fixed Income team, examines how stagflation-style stress and cross-asset volatility are reshaping the credit landscape and potentially creating selective opportunities.

1. Private credit deterioration is accelerating as BDCs report rising nonaccruals and questionable loan valuations while higher rates expose overleveraged structures in this illiquid corner of the market.
2. AI infrastructure spending creates a credit divide where mega-cap tech maintains robust capital access for data centers and long-term investments while software and leveraged borrowers face intensified scrutiny on business model durability.
3. Strong IG primary demand and open funding markets contrast sharply with rising dispersion in financials and insurance sectors, presenting entry points in defensive high-quality bonds as heavy supply and macro volatility reset spreads wider.

Positioning pays off: Conservative allocations and incoming cash flows shield high yield investors from geopolitical volatility that rattled broader markets.

Peter Keenan, Senior Credit Trader on RBC GAM's BlueBay U.S. Fixed Income team, examines how cash flows and positioning created an unexpected buffer against Middle East tensions.

1. High yield bonds showed resilience despite heightened Middle East tensions and surging oil prices on supply concerns from potential Strait of Hormuz disruptions.
2. Conservative positioning and substantial incoming cash from coupons, calls, and maturities created buying pressure in a market where geopolitical uncertainty sidelined new corporate issuance.
3. Treasury markets repriced sharply as investors unwound long positions, recalibrating expectations for Fed policy amid concerns about persistent inflation from rising energy costs.

RBC’s BlueBay Fixed Income team discusses how US markets have shown resilience with contained inflation, though heavy tech sector debt issuance from AI investment creates credit market pressure while raising questions about potential future inflationary risks.

1. January CPI rose just 0.2% monthly and 2.4% annually, below consensus, keeping two 2026 rate cuts priced in.
2. Technology sector's elevated 2026 capex projections are generating significant new supply in investment grade credit markets, creating technical spread pressure while high yield remains well positioned.
3. The AI investment cycle presents dual risks—whether monetization will justify near-term spending and whether competition for resources could generate inflationary pressure before productivity gains materialize.

Trump nominates Warsh for Fed chair as new governors potentially reshape this year’s rate outlook.

Laurie Mount, Portfolio Manager on RBC GAM's BlueBay U.S. Fixed Income team, breaks down how FOMC leadership changes and political headwinds are shaping the Fed's uncertain 2026 policy path.

1. Rates held at 3.50–3.75% as four hawkish members joined, though dissents from Governors Miran and Waller favored easing.
2. Warsh's Fed chair nomination faces Senate opposition pending a DOJ investigation into Powell.
3. Money market balances near $8 trillion as investors appear to favor short-duration positions.

Will tighter spreads hold as supply floods the market?

Anne Greenwood, Institutional Portfolio Manager on RBC GAM's BlueBay U.S. Fixed Income team, discusses the Fed's steady approach and how heavy corporate issuance is shaping the credit landscape.

1. The Fed is expected to hold rates this week, with the potential for up to 3 cuts later in 2026.
2. Corporate fundamentals remain solid, though shorter-dated bonds may offer advantages as front-end rates potentially decline.
3. Heavy corporate borrowing for AI spending, tech earnings results, and geopolitical tensions could impact spreads and bring volatility in Q1.

Signals of strength? U.S. banks’ Q4 earnings highlight steady fundamentals and confidence heading into 2026.

John Guarnera, Senior Corporate Analyst on RBC GAM's BlueBay U.S. Fixed Income team, analyzes the latest bank results and their implications for both economic fundamentals and sector positioning.

1. Investment banking surged—M&A advisory revenues climbed over 40% in some banks—while equity trading gains point to optimism in capital markets.
2. Asset quality remains stable across lending verticals, dispelling concerns around fraud events seen earlier in the year.
3. Loan growth in commercial sectors and steady deposits reinforce banks' sector momentum and ability to navigate credit and regulatory changes.

Tight spreads, tighter credit: What’s next for high-yield?

Tim Leary, Senior Portfolio Manager on RBC GAM’s BlueBay U.S. Fixed Income team, shares insights on high-yield market dynamics and potential credit risks in the year ahead.

1. Spreads across high-yield markets remain tight, supported by strong investor interest and steady issuance.
2. High-yield bond issuance can align with positive returns, underscoring resilience in market performance.
3. Trump’s proposal to cap credit card fees at 10% could hurt borrowers, with subprime consumers likely facing reduced access to credit.

A year of high returns or high risks? Fixed income markets look to navigate 2026’s key challenges.

In the latest edition of The Weekly Fix, Andrzej Skiba, BlueBay Head of U.S. Fixed Income at RBC GAM, explores a strong fixed income outlook for the new year, driven by carry income and economic momentum. However, the year also brings critical questions about monetary policy, the AI-driven capital wave, and heavy credit issuance.

1. High single-digit returns may be achievable, supported by carry income and projected economic growth.
2. Inflation remains above target, and potential rate cuts could hinge on changes at the Fed.
3. Credit markets may contend with heavy issuance, posing questions about demand and spread levels.

Amid high-short term rates and diverging Fed opinions, investors have turned to money market funds, waiting for clarity on the economic outlook.

In this week’s episode, Laurie Mount, Portfolio Manager with RBC’s BlueBay U.S. Fixed Income team, highlights key trends shaping cash management strategies:

• The Fed lowered the fed funds rate by 25 basis points to 3.50–3.75%, with varied perspectives on the pace of rate adjustments.
• Money market assets surpassed $8 trillion, fueled by elevated short-term rates and cautious investor sentiment.
• Looking ahead, 2026 may bring key labor market developments critical to inflation, growth, and further potential Fed cuts.