December 2025 Outlook: Fixed Income Credit Sector Views

Market Context
December marks a pivotal shift in credit market dynamics. The Federal Reserve surprised markets on December 10 by announcing immediate reserve management purchases—$40 billion per month in Treasury bills—signaling limited tolerance for brewing funding market pressures and a commitment to maintain system liquidity. This move, combined with fiscal tailwinds from the One Big Beautiful Bill (delivering tax refunds and investment incentives in Q1 2026), supports our view that growth will rebound to trend despite inflation remaining elevated at around 3% year-over-year. Inflation base effects should provide relief in H2 2026, while labor market dynamics reflect structural rebalancing rather cyclical weakness, with monthly breakeven job additions settling into a 25-75K equilibrium.

Simultaneously, the emergence of hybrid public-private financing structures to fund AI and data center buildouts is reshaping how corporations access capital. JP Morgan estimates over $5 trillion will be needed through 2030 just to support hyperscalers' compute capacity expansion. For investors, this evolution offers liquidity and complexity premiums for active allocators, but requires rigorous credit underwriting discipline to avoid becoming over-levered to single vendor ecosystems and structural concentration risks.

The recent barrage of Big Tech bond issuance has tested long-end spreads, with the IG credit curve steepening 10-15 bps over the past month. This development reinforces the committee's October recommendation to underweight long-end IG corporates, which have underperformed shorter-duration alternatives. The resilient economy, prudent underwriting standards, fiscal and monetary policy easing in tandem, and supportive technical backdrop reinforce our constructive stance on credit despite limited spread cushion.

Risk Positioning
This month, T. Rowe Price's Sector Strategy Advisory Group upgraded to a positive risk regime with a tactical credit overweight. The committee's conviction is supported by three converging themes:
 

• The One Big Beautiful Bill fiscal package will deliver tax refunds and investment incentives in early 2026, supporting resilient credit fundamentals despite tight valuations
• Proprietary quantitative models show systematic strategies positioned to add risk as volatility remains contained and we enter a seasonally supportive technical environment in credit markets
• The Federal Reserve's reserve management purchases demonstrate low tolerance for funding pressures and support risk assets
   

Top Ideas

• Overweight ABS and IG credit index CDX (USD and EUR) for lower-risk portfolios – the former offering superior spread pickup and structural protections versus duration-matched corporates and the latter providing highly liquid credit beta
• Overweight US HY and bank loans for higher-risk portfolios – delivering 6.57% and 7.6.%* yields respectively, with loan default rates declining from 4.3% peaks to 3.5%
• Underweight long-end US IG corporates – valuations remain in the richest percentile historically with minimal cushion
  *J.P. Morgan Leverage Loan Index as of 30 November 2025
   

Near-Term Risks
January issuance dynamics represent the primary near-term risk to current tight valuations. Credit markets typically see reduced December supply, but January brings heavy front-loading as corporates seek year-start financing for M&A and refinancing. The market will need to demonstrate an ability to absorb this supply, and underperformance of cash versus synthetics could materialize if issuance meaningfully exceeds expectations.

Our Approach to Tactical Asset Allocation
At the heart of our approach is a disciplined, repeatable process designed to calibrate both the right amount of portfolio risk and where to allocate that risk for the greatest advantage over the next one to three months. The Sector Strategy Advisory Group's process integrates quantitative relative value analytics, in-depth top-down macro research, and fundamental credit research to form a holistic and dynamic view of global credit markets.

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