GS Biswas Credit now surrounded by many faces of rates 6 Sep 2026

GS Biswas - Credit now surrounded by many faces of rates 6 Sep 2026 Avishek Biswas · Goldman Sachs · Credit MarketStrats Sun 6 Sep 2026, 2:36pm ET

Last Friday’s NFP came much stronger than expectations and disappointed those looking for a rally in rates. Market is now pricing 2.5 rate hikes by FED / 3.5 rate hikes by ECB over the next 12 months and from here rates should become the centre of attention for credit investors.

All-in yields / Fund flows / Rates-spread correlation

• The widely accepted view around the benefit of higher rates for credit is via the demand for all-in yields – which is now screening not too far off the highest levels over the past 10y (Graphic 2) after this year’s widening in rates. For default remote pockets (like IG credit), I expect all-in yields to remain a strong value proposition. Issue is, the move wider in rates is hurting the total returns of credit portfolios and credit fund flows have historically shown strong correlation with total returns (Graphic 3 / Graphic 4). An additional vulnerability in the set-up is getting introduced through the rates/spread correlations which are inching towards positive for EUR IG credit (Graphic 5) and already decently positive for USD credit (Graphic 6). • Focussing on European credit and it’s 2 segments (IG and HY) and looking at Graphic 3 / Graphic 4, recent fund flows vs total returns screen more dislocated in HY (relative to IG) – this dislocation is making EUR HY fund flows more vulnerable to sharp catch down to EUR HY total returns thereby reinforcing the case for European HY vs IG decompression trades (links). We are having traction on our pitch of short risk Xover 5y vs long risk Main 10y – reach out to our desk for refreshed pricing. • Touching back on rates/spread correlation, I was bit surprised to see LQD options pricing decently negative rates/spread correlation (Graphic 7) while the recent realized correlation in USD rates/IG spreads have been visibly positive. In my view LQD options look mispriced and for investors running longs in IG cash (both EUR and USD), buying 3-month expiry LQD puts screens as a pretty cheap way to hedge the risk of -ve total returns from further sell-off in rates.

• By now, readers of my recent notes know my apprehension around EUR HY credit. Not only are they facing the risk of fund flows catching down to total returns, they are also facing the headwind of higher interest expense. Graphic 9 demonstrates the growing divergence between current interest expense (coupons) vs the cost of issuing new debt/refinancing (yields) – not the best of timing for this divergence to be widening given the approaching 2028 maturity walls and given EUR HY coverage ratios don’t screen particularly strong (Graphic 10). Stay cautious on EUR HY and if you have some premium to spend on hedges, Xover payer spreads are a pretty good shout (reach out for our recommended strikes/expiries).

Long risk EUR IG cash vs short risk iTraxx Main

• The pushback on this going to be September supply and the iTraxx roll. But I will give two simple reasons why I like this trade : 1/ spread differential between EUR IG cash and iTraxx Main is close to the widest levels on a 1-year lookback (Graphic 11), 2/ from the beginning of September to the subsequent couple of months, EUR IG cash has historically outperformed iTraxx Main (except in 2022) – refer to Graphic 13. And unless rates see a severe sell-off from here (which one can hedge cheaply with LQD puts), I expect EUR IG cash to be well supported by the all-in yield demand. • Implementation : Buy LXY bond index futures vs short risk iTraxx Main (recommended holding period for the trade – 2 months).

Graphic 1 => Valuation vs moves in credit

Graphic 2 => EUR IG credit all-in yield getting close to the 10y highs