Tight spreads force caution, selectivity in credit markets

While spreads are at their lowest levels in almost a decade, there are some sectors and durations that can provide opportunities for corporate bond investors, says Gino Di Censo, director of global fixed income at CIBC Asset Management.

“We have maintained an overweight in corporate credit through most of our portfolios, and this is predominantly in defensive sectors,” Di Censo said in a Nov. 10 interview. “So we are being cautious on risk, but we recognize there are pockets or abilities to add a higher yield than the benchmark through strong credit discipline.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Di Censo is cautious on high-yield and long-dated corporate bonds in the public sector due to tightness in spreads and rich valuations. And while investment-grade corporate credit is supported by strong fundamentals, he said, spreads are also tight, so being selective is crucial.

“We do believe that tactical movements in duration can add alpha,” he said. “Duration or interest-rate risk can be your friend in a backdrop of volatility and easing interest rate policies.”

For instance, he said interest rate movements accounted for about 92% of the downside in 2022, as rates rose sharply based on the FTSE corporate bond benchmark. By contrast, in 2023 and 2024, interest-rate sensitivity contributed about 54% of the upside.

On the private credit side, Di Censo likes non-cyclical companies that generate steady, recurring cash flows independent of broader economic conditions. He said sponsor-backed companies get critical support from their private equity owners who recognize that their own capital is at risk during times of stress.

“So we like investing alongside a private equity sponsor to help support a business should things go south or have trouble,” he said.

Di Censo also likes the investment-grade infrastructure debt space. This includes long-dated, essential infrastructure assets with strong structural positions and well-supported cash flows.

“For those investors willing to compromise a little bit on return but want a very safe part of the private credit market, we think infrastructure credit — particularly investment-grade quality infrastructure credit — makes a lot of sense,” he said.

From a borrower standpoint, Di Censo prioritizes predictable cash flows, essential services, and recurring revenue models. And when balancing return, liquidity and default risk, he warned that it’s important to recognize you can’t maximize all three simultaneously.

“If an investor firm is pretending that they can maximize all three, it’s where you could eventually get into trouble.”

Di Censo said the biggest risk in 2026 in public credit is repricing around the soft-landing view. Markets expect rate cuts and steady growth, he said, but stubborn inflation or fiscal pressures could push spreads wider, especially in lower quality parts of the market. Liquidity also remains a key concern.

Meanwhile, higher rates and a quiet M&A market will make it harder for private credit managers to deploy funds, he said.

“A lot of the 2020 and 2022 vintages were underwritten on aggressive leverage with possibly light covenants, and now we’re seeing some of those asset managers reporting stress building through some of these loans,” Di Censo said. “Keeping a watchful eye on these parts of the market, I think, is paramount.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.