Historical context: Credit markets through cycles
Credit markets have always reflected broader economic forces, cycling through periods of expansion, stress and recovery. Over the past two decades, investors have witnessed dramatic shifts—from the aftermath of the global financial crisis to the era of ultra-low interest rates, and now, a return to higher yields and renewed scrutiny of credit quality.
During the 2008 financial crisis, systemic risk and widespread defaults shook investor confidence. In the years that followed, central banks injected liquidity, supporting a prolonged period of low rates and robust corporate borrowing. This environment fostered risk-taking but also masked vulnerabilities that would only surface as monetary policy tightened.
The COVID-19 pandemic brought another wave of uncertainty, but credit markets rebounded quickly, buoyed by fiscal stimulus and resilient consumer demand. As economies reopened, investors grew accustomed to stability—yet history reminds us that credit cycles are inevitable, and cracks can emerge even in seemingly strong markets.
Recent developments: defaults and market resilience
In mid-October 2025, headlines have focused on a series of notable defaults, raising questions about the health of the credit market. However, a closer look reveals that these incidents are largely idiosyncratic, driven by company-specific challenges rather than systemic weakness.
- Isolated defaults: Recent defaults have occurred in sectors facing unique pressures, such as commercial real estate and select consumer industries. These events, while significant, have not triggered broader contagion.
- Market adaptability: Credit markets have demonstrated resilience, with investors and issuers adapting to evolving risk profiles.
- Treasury rates: The 2022-2024 rise in Treasury yields shifted the fixed income landscape, offering new opportunities but also requiring careful assessment of duration and credit risk.
Panel insights: Franklin Templeton’s perspective
Franklin Templeton leverages our cross-asset class and specialty investment teams to assess the current environment, to collaborate and gain valuable insights from different disciplines, which highlights several important themes. Our latest meeting on the credit environment revealed the following:
Resilience amidst defaults
Michael Buchanan, CIO of Western Asset Management, noted:
“We’re seeing defaults, but they’re not spreading across the market. The fundamentals—especially among consumers and large corporates—are still strong.”
Idiosyncratic risks and sector stresses
Jacquelyne Cavanaugh, Portfolio Manager at Putnam, emphasized:
“It’s critical to look beyond the headlines and assess each credit on its own merits. Diversification and due diligence are more important than ever.”
Opportunities in a higher rate environment
Josh Lohmeier, Portfolio Manager at Franklin Templeton Fixed Income, observed:
“The rate environment is creating opportunities, but it’s also exposing weaknesses. Investors need to be selective and proactive.”
Instability can bring opportunity
Bill Zox, Portfolio Manager at Brandywine, highlighted:
“After an extended period of stability investors should prepare for instability. You want to face volatility and illiquidity from a position of strength because that is when the opportunities are plentiful.”
Downside risk mitigation
King Jang, Managing Director at Benefit Street Partners, added:
"We're hyper focused on LME [Liability Management Exercises] provisions, amongst other things, making sure that credit documents really offer the downside risk mitigation that we're supposed to get when investing in credit."
Actionable items for investor portfolios
Based on current market conditions and insights from Franklin Templeton’s panel, here are practical steps investors can consider to navigate the evolving credit landscape:
1. Maintain vigilance on idiosyncratic risks
- Regularly review credit exposures, focusing on sectors and issuers with heightened risk.
- Pay close attention to company fundamentals, management quality and sector trends.
2. Diversify holdings
- Spread investments across sectors and issuers to mitigate the impact of isolated defaults.
- Consider adding exposure to resilient sectors, such as technology and health care, while managing risk in more volatile areas.
3. Assess underwriting standards
- Ensure that credit investments meet robust criteria, especially in stressed sectors.
- Work with advisors to evaluate the quality of new issuances and existing holdings.
4. Monitor health indicators
- Track consumer and corporate health metrics as leading signals for credit quality.
- Use data-driven analysis to identify early signs of stress or opportunity.
5. Evaluate yield opportunities
- Consider the risk-return profile of higher-yielding assets in today’s rate environment.
- Balance the pursuit of income with prudent risk management.
6. Stay responsive to market changes
- Be prepared to adjust portfolios as market conditions evolve.
- Remain flexible and open to reallocating assets in response to new information.
7. Consult advisors regularly
- Engage with Franklin Templeton advisors to align strategies with the latest market developments.
- Leverage expert insights to make informed decisions and optimize portfolio outcomes.
Conclusion: Navigating uncertainty with confidence
We view the recent cracks in the credit market as serving as a reminder that vigilance, discipline, and adaptability are essential for long-term success. While defaults and sector stresses may capture headlines, the underlying resilience of the market—and the opportunities presented by higher rates—offer a constructive outlook for investors.
By maintaining a diversified, carefully constructed portfolio and staying attuned to market developments, we believe investors can navigate uncertainty with increased confidence. Franklin Templeton remains committed to providing timely insights and actionable guidance to help clients achieve their financial goals in any market environment.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.
Diversification does not guarantee a profit or protect against a loss.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
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