Real rates return to the forefront of credit markets, with USD credit more likely to face simultaneous pressure from rates and spreads

Overview

The report examines how rising long-term rates in the US and Europe during 2026 transmit through real rates, inflation compensation, and term premia into credit spreads, curve shapes, and the relative performance of fixed- and floating-rate assets. Its core conclusion is that the rate buffer for USD credit is weakening, while the euro credit buffer may also become unstable because of energy prices; cash credit and yield-based expressions are therefore more appropriate than outright spread bets.

Core views

Since the start of 2026, 10-year nominal yields in both the US and Europe have risen by 35—45bp, but the composition has differed markedly. The increase in US rates came almost entirely from real rates, while market-implied inflation has returned to its pre-Iran war level. European real rates rose by less, with sticky natural gas prices keeping inflation compensation elevated but no longer rising, while resilient economic activity has refocused market attention on growth. This divergence means the two credit markets respond differently to changes in rates. Rate-spread correlations in USD investment-grade and high-yield credit have turned positive, while euro credit continues to exhibit a negative correlation. The report argues that selloffs driven entirely by real yields are generally unfavorable for credit: higher term premia, fiscal concerns, and required returns on long-duration assets raise discount rates without simultaneously strengthening corporate pricing power or cash flow expectations. Private-sector borrowing, particularly for artificial intelligence capital expenditure, is also exerting upward pressure on real rates. Consequently, if real rates continue to rise, rate losses on USD bonds may compound with wider credit spreads rather than offset them. Under this mechanism, Goldman Sachs believes its USD credit view is better expressed through cash bonds and yields rather than synthetic credit indices or outright spread trades. The report reiterates that the rationale for allocating to credit assets should be coupon and yield income, rather than expectations that falling rates or further spread tightening will generate additional total returns. Conversely, absent a major growth shock, a decline in real rates would be more likely to reflect lower term premia or real-rate risk premia; moderate macroeconomic data and greater clarity around the Federal Reserve's policy framework could facilitate such an outcome. Even if spread compression were limited, lower rates would directly improve cash bond total returns, making cash credit the clearer expression. Euro credit starts from a different position. The current rate-spread correlation is negative, but Europe must close its natural gas inventory gap before winter, and seasonal demand may keep gas prices sticky, with risks skewed to the upside. Because the spillover from energy pressure into core inflation has so far been limited and economic activity remains resilient, near-term euro rates are more likely to be driven by inflation compensation, provided gas prices do not rise enough to cause demand destruction. Most scenarios therefore suggest that the correlation will no longer remain firmly negative: an extreme bearish scenario is still better expressed through spread products or synthetic indices; if natural gas prices rise while economic activity remains resilient, or if the energy issue moves closer to resolution, inflation compensation and credit spreads may move in the same direction, giving yield-based and cash credit expressions greater convexity. The current steepening of the rates curve has not produced the credit spread curve flattening commonly seen in the past. USD investment-grade 2s10s and 5s10s spread curves have steepened by 6bp and 3bp, respectively, since July. The report explains that higher discount rates and term premia at the long end of the curve reduce investor demand for long-term credit risk and increase the compensation required to hold long-dated bonds. Thus, when rising yields are driven by real rates rather than improving inflation expectations, the rates curve and credit curve can steepen simultaneously. Excluding artificial intelligence-related issuers, the back end of the USD credit curve remains relatively flat, supported mainly by higher issuer quality, strong demand from liability-driven investors, and limited supply. However, starting from a flat base, further increases in back-end rate pressure and volatility could still steepen the credit curve. The euro investment-grade curve has generally remained range-bound with a slight flattening bias, and its movements appear more related to supply technicals than to rates: 10-year maturities account for 23% of new nonfinancial euro investment-grade issuance, below the 28% average since 2015. Duration headwinds have also changed the comparison between fixed-rate bonds and floating-rate loans. Since the start of 2026, the 5-year US Treasury yield has risen by 50bp relative to 3-month SOFR, but the yield differential between B-rated high-yield bonds and loans has remained broadly flat because tighter high-yield bond spreads offset rising Treasury yields, while loan spreads widened somewhat. USD B-rated loans currently still yield 59bp more than similarly rated high-yield bonds. Goldman Sachs maintains a modest preference for high-yield bonds but acknowledges that the view now depends more on credit factors: bond issuers are of higher quality, the maturity wall through 2028 is relatively manageable, and this year's unusually favorable net supply environment in the loan market may normalize. On the other hand, if upward rate pressure shifts toward the front end of the maturity curve, it would align more closely with the duration of high-yield bonds and create a headwind. The report also prefers high-yield bonds over loans in the euro market; on a like-for-like ratings basis, B-rated euro high-yield bonds yield 27bp more than loans. Senior CLO debt and USD investment-grade bonds provide another fixed-versus-floating comparison. The prior view of increasing senior CLO exposure while reducing USD investment-grade bond exposure on a relative basis has worked. Although senior CLOs retain a modest spread premium, higher term rates have pushed their yields below those of USD investment-grade bonds. AAA-rated CLOs are supported by regulatory capital considerations, while issuance related to mega-cap technology companies creates supply pressure for AA-rated USD investment-grade bonds, favoring a relative-value pair trade based on spreads. On a yield and carry basis, AA-rated CLOs may be more attractive than A-rated investment-grade bonds while offering exposure to similar market themes. As of August 26, 2026, USD investment-grade and high-yield spreads and yields were 79bp and 5.4%, and 265bp and 7.2%, respectively; euro investment-grade and high-yield figures were 90bp and 3.9%, and 258bp and 6.0%, respectively. USD and euro leveraged loan indices stood at 421bp and 8.1%, and 451bp and 7.1%, respectively. The forecast dashboard shows current durations of 6.8, 3.2, 4.5, and 3.1 for USD investment grade, USD high yield, euro investment grade, and euro high yield, respectively; 2026 year-to-date excess returns were 0.4%, 1.9%, 0.7%, and 1.8%, respectively, while full-year forecasts were 0.5%, 1.3%, 0.5%, and 1.4%.

Analysis framework

The report first decomposes changes in US and European nominal rates into real rates and inflation compensation, then examines the correlation between rates and credit spreads to determine whether rates can continue to cushion credit returns. It subsequently analyzes curve slopes such as 2s10s and 5s10s, along with supply-demand technicals for long-dated bonds, and compares the yields, spreads, duration, issuer quality, and maturity pressure of high-yield bonds, leveraged loans, CLOs, and investment-grade bonds on a like-for-like ratings basis. Finally, it supplements its relative-value assessment with dashboards covering market performance, valuation, liquidity, fund flows, issuance, fundamentals, and default migration.

Methodology notes

• Fixed income and credit analysisThree-factor rate decomposition

  Decomposition of nominal yields into real rates, inflation compensation, and term premia

  The report uses the sources of rising yields to explain credit market reactions: the US move is driven mainly by real rates and term premia, while Europe is more affected by inflation compensation and natural gas prices. Different drivers imply different transmission mechanisms among discount rates, cash flow expectations, and credit spreads.

• Fixed income and credit analysisSpread analysis

  Rate-credit spread correlation and yield-based expressions

  The report compares whether rates and credit spreads move in the same or opposite directions and uses this to determine whether cash bonds, synthetic indices, yield trades, or spread trades best reflect its scenario analysis.

• Fixed income and credit analysisYield curve analysis

  Comparison of rates curve and credit spread curve slopes

  Using the USD investment-grade 2s10s and 5s10s curves, back-end spreads, and maturity supply in euro investment grade, the report examines whether rates curve steepening will lead investors to demand greater compensation for long-term credit risk.

• Fixed income and credit analysis

  Ratings-adjusted relative-value comparison of fixed- and floating-rate credit

  The report compares high-yield bonds and loans at the same B rating and incorporates duration, issuer quality, net supply, and the maturity wall to avoid attributing yield differences solely to fixed- or floating-rate structures.

• Quantitative/Factor/Portfolio theory

  Index-based credit market dashboard

  The report uses Bloomberg, ICE-BAML, iBoxx, and Morningstar indices to track US and European investment-grade, high-yield, securitized products, and leveraged loans. Historical start dates include June 1989 for USD investment grade, January 1994 for USD high yield, January 1999 for euro investment grade, December 1997 for euro high yield, and January 1997 and January 2002 for USD and euro leveraged loans, respectively.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD cash credit

  The report considers it better suited than synthetic credit exposure for expressing the current rates view.

  Strengths

  Provides direct coupon and yield income; if real rates decline, total returns can improve even if spread compression is limited.

  Weaknesses

  If real rates continue to rise, rate losses may compound with credit spread widening.

  Comparison

  Compared with synthetic indices, cash bonds better capture changes in yields and total returns.

  Risks

  Further increases in term premia, fiscal concerns, or required returns on long-duration assets.

• Euro cash credit

  In most non-extreme scenarios, the report favors yield-based and cash credit expressions.

  Strengths

  If inflation compensation and credit spreads move in the same direction, yield-based expressions offer greater convexity.

  Weaknesses

  The current negative rate-spread correlation may no longer remain stable.

  Comparison

  Spread products or synthetic indices remain better suited to an extreme bearish scenario.

  Risks

  Rising winter natural gas prices may push yields higher and cause the correlation to turn unfavorable.

• USD high-yield bonds

  Goldman Sachs maintains a modest preference for their performance relative to USD leveraged loans.

  Strengths

  Higher issuer quality and a relatively manageable maturity wall through 2028.

  Weaknesses

  Their fixed-rate duration makes them more vulnerable to rising rates.

  Comparison

  USD B-rated loans still yield 59bp more than similarly rated high-yield bonds, but high-yield bonds have advantages in credit quality and refinancing pressure.

  Risks

  If upward rate pressure shifts toward the front end, it will more directly affect high-yield bond duration.

• Euro high-yield bonds

  The report prefers their performance relative to euro leveraged loans.

  Strengths

  On a like-for-like ratings basis, B-rated high-yield bonds yield 27bp more than loans.

  Weaknesses

  They still face pressure from fixed-rate duration and energy-driven increases in rates.

  Comparison

  The ratings-adjusted yield advantage favors high-yield bonds.

  Risks

  Rising natural gas prices and inflation compensation may weaken credit returns.

• Senior CLO debt

  The report's prior preference to add senior CLOs on the long side relative to USD investment-grade bonds has worked.

  Strengths

  Retains a modest spread premium; AAA-rated CLOs are supported by regulatory capital considerations, while the carry on AA-rated CLOs may be more attractive than on A-rated investment-grade bonds.

  Weaknesses

  Following the rise in term rates, senior CLO yields have fallen below those of USD investment-grade bonds, so the yield advantage is no longer evident.

  Comparison

  Senior CLOs remain superior to USD investment-grade bonds on a spread basis but are now tighter on a yield basis; the comparison between AA-rated CLOs and A-rated investment-grade bonds is more attractive.

  Risks

  The spread premium is thin, and relative value depends on ratings, regulatory capital, and supply technicals.

Key data

• US and European 10-year nominal yieldsUp 35—45bp year-to-date in 2026The US move was driven almost entirely by real rates, while European real rates rose by less and inflation compensation remained stickier.
• USD investment-grade 2s10s spread curveSteepened by 6bp since July 2026In tandem with the steepening of the rates curve.
• USD investment-grade 5s10s spread curveSteepened by 3bp since July 2026Required compensation for long-term credit risk increased.
• Share of 10-year euro investment-grade issuance23%Below the 28% average since 2015.
• 5-year US Treasury relative to 3-month SOFRWidened by 50bp year-to-date in 2026Despite this, the yield differential between B-rated high-yield bonds and loans remained broadly flat.
• USD B-rated loans relative to B-rated high-yield bonds59bp higher yieldThe report still modestly prefers high-yield bonds, based more on credit quality and maturity structure.
• Euro B-rated high-yield bonds relative to B-rated loans27bp higher yieldRatings-adjusted relative value supports high-yield bonds.
• Current USD investment-grade marketSpread 79bp; yield 5.4%As of August 26, 2026.
• Current USD high-yield marketSpread 265bp; yield 7.2%As of August 26, 2026.
• Current euro investment-grade marketSpread 90bp; yield 3.9%As of August 26, 2026.
• Current euro high-yield marketSpread 258bp; yield 6.0%As of August 26, 2026.
• USD leveraged loan indexSpread 421bp; yield 8.1%As of August 26, 2026.
• Euro leveraged loan indexSpread 451bp; yield 7.1%As of August 26, 2026.
• USD investment-grade excess return0.4% year-to-date in 2026; full-year forecast 0.5%Current duration 6.8.
• USD high-yield excess return1.9% year-to-date in 2026; full-year forecast 1.3%Current duration 3.2.
• Euro investment-grade excess return0.7% year-to-date in 2026; full-year forecast 0.5%Current duration 4.5.
• Euro high-yield excess return1.8% year-to-date in 2026; full-year forecast 1.4%Current duration 3.1.

Impact & implications

The report argues that credit returns should no longer be viewed as naturally protected by falling rates. If a USD market selloff continues to be driven by real rates and term premia, rate losses and spread widening may compound; Europe's current negative-correlation buffer may also weaken as natural gas prices and inflation compensation change. Its relative-value conclusions therefore favor cash bonds, coupon income, and yield-based analysis, with greater emphasis on duration, curve position, rating quality, and maturity structure.

Risks

• Further increases in US real rates and term premia may simultaneously cause bond rate losses and widening USD credit spreads.
• Rising European winter natural gas prices may push up inflation compensation and yields, causing the current negative rate-spread correlation to turn unfavorable.
• If natural gas prices rise enough to cause demand destruction, European credit will face more extreme growth and spread pressures.
• Further increases in long-end rate pressure and volatility may cause the currently flat back end of the credit curve to steepen again.
• A shift in upward rate pressure toward the front end may increase the duration headwind for high-yield bonds relative to loans.

What to watch

• Track US real rates, term premia, and the rate-spread correlations of USD investment-grade and high-yield credit.
• Monitor Jackson Hole-related information and whether the Federal Reserve's policy framework becomes clearer.
• Monitor Europe's natural gas inventory gap, winter prices, inflation compensation, the resilience of economic activity, and whether demand destruction emerges.
• Track USD investment-grade 2s10s and 5s10s curves and the back-end credit curve excluding artificial intelligence-related issuers.
• Monitor issuance maturity structures, bond repurchase policies, and changes in long-dated credit bond supply.
• Compare ratings-adjusted yield differentials between US and European high-yield bonds and loans, as well as CLO spreads and yields relative to USD investment-grade bonds.