Risk. What Risk?

• Risk appetite in the Leveraged Loan and High Yield markets remains strong

• Macros are slowing, not cracking 

• Data favors Fed patience

This was an economic data heavy week with no dearth of headlines on Venezuela, oil and the topic of affordability in the US, driving the President’s decision to direct Freddie & Fannie Mae to buy $200 billion of home mortgages. That said, both loan and high yield markets are constructive on risk as evidenced by strong issuance volumes in both markets and tightening yields as we step into 2026. 

Credit markets remain constructive despite mixed macro: HY CCC yields are sub-10%, with BB and B yields in the mid-5s and 6s, and spreads at ~600 bps (CCC), ~260 bps (B), and ~160 bps (BB). Lower yields and tighter spreads pulled issuance above $10bn by Friday morning, with several deals oversubscribed in multiples, priced at the tight end and upsized.

Loan issuance skewed toward opportunistic repricings: Of the 17+ loan deals launched, 12 were repricings as issuers took advantage of strong technical conditions. New money activity included a $5bn Hologic LBO.

Labor market cooling but still stable: Payrolls rose by 50k in December, below expectations, with prior months revised lower; average monthly job gains in 2025 slowed meaningfully to ~49k versus 168k previously. Initial claims edged up to 208k but below consensus of 210k, job openings declined to 7.1mm, and quits rose to 3.2mm (bullish sign). Services PMI strengthened to 54.4 with a higher employment component. Overall, while the labor market has slowed down, both hirings & firings remain under control.

Productivity offsets softer demand and sentiment: Nonfarm productivity surged 4.9%, well above consensus, helping cushion slower hiring. Manufacturing PMI remained contractionary (47.9 versus 48.4 consensus), the trade deficit narrowed sharply—signaling softer consumer demand and lingering pre-buying effects—and consumer sentiment improved modestly from 52 to 54 but remains well below its late-2024 peak of 74. Inflation expectations component of the sentiment remains elevated in the low-4s, although below the mid 6’s post Liberation Day. 

Rate implications: Taken together, the data supports a patient Fed stance, with productivity gains allowing policy to remain restrictive unless consumer demand deteriorates more sharply or policy-related shocks emerge. That said, this view is based on fundamental analysis and assumes no political influence on monetary policies. 

Conclusion: While the market will continue to produce no shortage of thoughtful analysis—and I remain an avid consumer of it—I am increasingly leaning toward flight-to-quality trades. This means favoring high single-B and BB credits over lower-quality single-Bs & CCC’s, and emphasizing fundamentally strong sectors over areas more exposed to policy uncertainty, the AI boom, crypto speculation, and oil production volatility.

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