Man Group believes the credit cycle is entering a new phase, with early signs pointing to a transition from late expansion to early downturn. While earnings have held up in 2025, the investment manager highlights growing stress in US credit markets and warns that the end of the cycle may not follow historical patterns. Instead of a broad-based downturn, the firm expects a sequence of mini cycles marked by rolling distress across specific sectors.
Corporate fundamentals remain solid, but several warning indicators have emerged. Consumer confidence has dropped, corporate capex intentions are at multi-year lows and credit card delinquencies have returned to pre-pandemic levels. The household debt burden is rising across mortgage, auto and student loans, with the recent resumption of defaulted student loan collections adding to pressure. Lower-income households are feeling the impact first, but the strain is beginning to appear more broadly.
US business sentiment has also weakened, with companies pulling back on hiring and investment. Despite 78% of S&P 500 firms beating earnings estimates in the first quarter, management teams have turned cautious. Man Group notes that forward indicators such as capital expenditure plans have dropped to their weakest levels since 2020. The outlook is clouded by geopolitical risks and the Biden administration’s shifting trade policies, including aggressive tariff hikes earlier this year.
These tariffs have disrupted global supply chains and contributed to falling growth expectations. The IMF slashed its GDP forecasts for major developed economies in April, citing uncertainty stemming from US trade actions. Yet despite slowing growth and weakening sentiment, the Federal Reserve has held off cutting rates, constrained by stagflation risks and rising fiscal deficits. As a result, the market is adjusting to a “higher for longer” interest rate environment that could accelerate refinancing stress across the credit spectrum.
Man Group notes that leverage is ticking up in US high-yield and leveraged loan markets. Balance sheets in Europe appear healthier by comparison, but the gap is narrowing. At the same time, commercial real estate delinquencies have reached their highest levels since 2014, posing risk to regional US banks with heavy exposure. Default activity has picked up, with distressed transactions rising steadily since 2023. The firm expects more liability management exercises in the coming quarters as companies struggle to manage debt costs.
Despite these headwinds, credit spreads remain tight. Investment-grade spreads are near the bottom of their historical range, and high-yield spreads are also low relative to recessionary periods. Man Group believes markets are not fully pricing in the risk of a slowdown. The firm sees opportunities in selected parts of European and Asian credit, where fundamentals remain stronger and policy support is more visible. In Europe, German fiscal stimulus and a clearer path to rate cuts have improved the backdrop. The group prefers financials in the UK, Germany and the Nordics, citing robust institutions and tighter regulation.
See also: Trade policy turmoil raises recession risk, but long-term equity outlook holds up: Capital Group
Asian credit markets have performed well in 2025, supported by manageable inflation and a decline in trade-related shocks. Ytd returns for both investment-grade and high-yield bonds stand above 3%. Korean financials, especially insurance Tier 2 bonds, are seen as attractive, with short-duration high-yield bonds offering a favourable carry-to-risk profile. Valuations have normalised, but yields remain elevated enough to support total returns in the second half of the year.
Meanwhile, emerging market (EM) debt presents a more mixed picture. Man group is constructive on local currency debt in Mexico and Brazil, where real yields and growth outlooks are relatively strong. However, tight sovereign and corporate spreads leave little cushion against rising US rates or geopolitical surprises. Rising debt-to-GDP levels and fiscal pressures could also weigh on performance in weaker EM names.
Man Group sees value in convertible bonds, catastrophe bonds and selected private credit segments. Global convertibles have returned 5.3% so far this year, supported by attractive valuations and elevated equity volatility. The firm notes that small- and mid-cap convertibles are trading at historically wide discounts relative to large-cap peers. In catastrophe bonds, issuance has surged to record highs, with US$15 billion in new deals so far this year and market capitalisation at an all-time high. The asset class has offered diversification through recent bouts of equity and credit volatility and continues to attract institutional interest.
See also: EM credit resilient and ready: Muzinich & Co
In private markets, sponsor-backed middle market direct lending is seen as a source of stable yield, particularly in non-cyclical and inflation-resilient sectors. However, spread compression in the upper middle market has made selectivity even more important. Lender finance strategies in the US residential space are also gaining traction, supported by structural supply constraints, rising house prices and low foreclosure risk.
Man expects dispersion to increase in the second half of the year, creating opportunities for active investors with a focus on fundamentals. With credit stress appearing sporadically rather than systemically, security selection and sector differentiation will be critical. The firm warns that markets are not adequately discounting recession risk, and that the current environment calls for a defensive stance, particularly in highly leveraged or consumer-facing sectors.
The way Man Group sees it, while overall fundamentals remain acceptable, the market is entering a more fragile phase. Investors should brace for volatility and avoid overreliance on generic risk factors such as carry or momentum. With trade policy, inflation and fiscal dynamics all in flux, the second half of 2025 could test the limits of credit market resilience.
