Goldman Sachs: Credit markets are more likely to see dispersion than systemic disruption

Overview

This Goldman Sachs credit strategy report discusses relative value in corporate credit markets under high interest rates, tight spreads, rising supply, and an AI-related financing cycle. The core judgment is that credit markets face more dispersion, but not broad disruption. Investment-grade markets remain supported by all-in-yield buyers, while high yield and private credit require greater focus on differences across rating tiers, industries, and borrower quality.

Core views

The report expects USD and EUR corporate bond spreads to widen moderately, but not disorderly. Rates remain the key variable for IG credit returns and valuations; USD credit still has a modest advantage over EUR credit; within USD IG, BBB is preferred over AA/A higher-rated segments; dispersion is significant in HY, with BB relatively more attractive; and stress indicators in private credit should be monitored, though they do not currently signal widespread fundamental deterioration.

Analysis framework

Through the decomposition of spreads and all-in yields, regional excess return comparisons, rating-tier performance and supply structure, bond-level dispersion, USD IG issuance volume, technology-sector supply share, private credit returns and loss rates, and stress indicators such as non-accrual loans and amended PIK, the report forms a relative-value assessment of public and private credit.

Methodology notes

• Relative ValueSpread and All-in Yield Decomposition

  Assess the contribution of credit spreads to total yield

  When risk-free rates are high, the appeal of IG credit comes more from all-in yields than from spreads themselves, so the path of rates and rate volatility have a greater impact on credit valuations.

• Market StructureRegional and Rating-Tier Dispersion Analysis

  Compare performance, supply, and risk premia across USD/EUR and IG/HY rating tiers

  The report uses regions, rating tiers, and issuance structure to explain differences in credit performance, arguing that dispersion is the main feature of today’s credit markets.

• Risk MonitoringLeading Stress Indicators for Private Credit

  Track new non-accrual loans and amended PIK

  These two indicators can serve as early signals of potential stress in private credit; they rose in 1Q2026, but the report believes they have not yet reached abnormal levels.

Asset mapping & comparison

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

• USD IG Corporate Bonds

  The report believes they are supported by yield-oriented buying and prefers the BBB rating bucket within IG.

  Strengths

  Deep demand from pensions and insurers, attractive all-in yields, and fundamentals that remain broadly resilient.

  Weaknesses

  Valuations are tight, supply is high, and a rising share of AA-and-above issuance may create technical pressure.

  Comparison

  There is still a modest preference versus EUR credit; within USD IG, BBB offers better relative value than AA/A.

  Risks

  Higher rate volatility, supply exceeding seasonal norms, and market absorption pressure from AI and M&A financing.

• EUR IG Corporate Bonds

  The report is more cautious on EUR markets relative to USD, but does not advocate an excessive move up in quality.

  Strengths

  The IG market can still be supported by yield demand.

  Weaknesses

  The euro area mix of growth, inflation, and monetary policy is less favorable than in the US.

  Comparison

  The report slightly prefers A over BBB, but believes technicals around AA supply may gradually become a headwind.

  Risks

  ECB rate hikes, slower growth, and modest relative decompression of HY versus IG.

• USD HY High-Yield Bonds

  The report emphasizes HY dispersion and bond selection, overweighting BB, neutral on CCC, and underweighting B.

  Strengths

  The BB bucket offers relatively better risk compensation, and the gap between strong and weak credits within HY provides selection opportunities.

  Weaknesses

  The B rating bucket is relatively unattractive, and weaker credits may face asymmetric downside.

  Comparison

  The stance is more constructive than on EUR HY, though selectivity is still required.

  Risks

  Fundamental deterioration, AI-related disruption, and rising rates and financing costs.

• EUR HY High-Yield Bonds

  The report takes a more cautious stance, overweighting BB, neutral on B, and underweighting CCC.

  Strengths

  The BB bucket can still offer a better balance of quality and yield.

  Weaknesses

  The macro backdrop is weaker, and lower-rated issuers are more sensitive to financing conditions.

  Comparison

  More cautious than USD HY, with EUR HY expected to modestly underperform IG on a relative basis.

  Risks

  ECB rate hikes, weaker growth, credit decompression, and refinancing pressure.

• Private Credit / US Direct Lending

  The report’s base case is dispersion rather than broad disruption.

  Strengths

  Institutional capital accounts for more than 85% of AUM, so redemption pressure is not comparable to retail vehicles; performance in 1Q2026 was better than USD HY and leveraged loans, and an illiquidity premium remains.

  Weaknesses

  Redemptions from retail private credit vehicles are still ongoing, and stress indicators rose in 1Q2026.

  Comparison

  US direct lending LBO spreads are about 140bp wider than broadly syndicated loans, indicating that a relative premium still exists but has narrowed versus 2022-2023.

  Risks

  New non-accrual loans, amended PIK, potential AI-related disruption in the software sector, and higher debt service costs for floating-rate issuers.

Key data

• Holdings of yield-oriented buyers in USD corporate bondsAt least 40%The report estimates that yield-oriented buyers such as pensions and insurers hold at least 40% of the outstanding notional amount of USD corporate bonds.
• USD IG long-end yield comparison5.7% vs 4.8%The long-end yield of USD IG is 5.7%, above the average bond portfolio yield of 4.8% for the US life insurance industry.
• Year-end 2026 rate forecast10-year UST 4.4%, German Bund 3.0%Goldman Sachs rate strategists expect both to remain range-bound through year-end 2026.
• Change in spreads as a share of all-in yieldUSD IG 43% to 15%; USD HY 73% to 39%; EUR IG 84% to 23%; EUR HY 88% to 47%Compared with the 2010-2021 average versus current levels, this shows the rising importance of risk-free rates in relative value for credit.
• Share of EUR IG issuance by US issuersMore than 17%Year to date, this accounts for more than 17% of total EUR IG issuance, the highest since 2017, showing that regional boundaries are becoming blurred.
• USD IG supplyAbove $1.2 trillion in 1H2026, full-year forecast $2.1 trillionThe report believes there is upside risk to the full-year USD IG gross issuance forecast.
• Technology sector share of USD IG supply20%The technology sector accounts for 20% of total USD IG supply, a record high, with the AI-related investment cycle as an important backdrop.
• Private credit performance and riskDirect lending yield 9.8%, realized loss rate 58bp over the past 12 months58bp is below the historical average of 100bp; US direct lending LBO spreads are about 140bp wider than broadly syndicated loans.

Impact & implications

The investment implication is to avoid simply interpreting tight spreads as a blanket bearish signal. As long as rates remain range-bound and yield-oriented buying persists, IG spreads may stay relatively anchored; however, supply, rate volatility, AI capex, disruptions in the software sector, and private credit stress indicators will determine the degree of dispersion. At the portfolio level, it is more appropriate to earn risk compensation through regional, rating-tier, and bond selection rather than by simply betting on index-level direction.

Risks

• A sharp rise in rate volatility could force credit investors to demand higher risk premia.
• If USD IG supply, M&A, and AI-related financing are released above seasonal norms, technical pressure could emerge.
• A weaker euro area growth, inflation, and monetary policy mix could cause EUR credit to underperform on a relative basis.
• Greater dispersion within HY means weak credits and potentially asymmetric downside scenarios need to be avoided.
• If AI-related disruption in the software sector is confirmed, it could affect both private credit and the broadly syndicated loan market.
• Rising new non-accrual loans and amended PIK in private credit require continued monitoring.

What to watch

• Whether 10-year US Treasuries and German Bunds remain range-bound as expected in the report.
• Whether the correlation between rate volatility and credit spreads continues to rise.
• Whether USD IG summer supply, M&A financing, and AI-related capex financing exceed expectations.
• The weight of the technology sector in the USD IG index and the concentration of issuance.
• The gap in excess returns between USD and EUR credit and changes in cross-border issuance share.
• Risk premia and expected realized losses across BB, B, and CCC rating buckets in HY.
• New non-accrual loans, amended PIK, and the composite stress rate in private credit.
• Fed and ECB policy responses, especially their impact on borrowing costs for floating-rate borrowers.