Bond navigators: Sterling Credit – Backwater to safe harbour

Sterling credit markets are often dismissed as an irrelevance – a backwater. Representing less than 5% of global credit markets, they have at times been ignored by the hottest issuers, who favour the perceived depth of euro, and notably US dollar, markets.

But as global credit markets are increasingly shaped by concentrated geographic and sector risks, the historic reasons why sterling credit can be viewed as a bit of a boring backwater may now be the very reasons it stands as a relative safe harbour against emerging storms. The sheer scale of dollar issuance, itself dominated by certain ‘trendy’ sectors that have sucked in astronomical levels of capital and funding in recent years, as well as diverging regulatory backdrops, have resulted in structural differences in index composition that meaningfully distinguish sterling credit from its dollar peers. Is the market now beginning to realise that rather than being a disadvantage, there is real strength in difference?

The historic reasons why sterling credit can be viewed as a bit of a boring backwater may now be the very reasons it stands as a relative safe harbour

Tech: less is more

One of the growing concerns for investors is the risk of a bubble in the tech sector. These concerns are understandable for equity investors; with tech now making up a whopping 25% of global equity indices (see figure 1), relative exposure here will make or break performance.

Any tech exposure worries are more easily assuaged when looking at credit markets. For dollar credit, the sector makes up almost 10% of indices; a lower but still meaningful part of the index, especially when considering the asymmetric risk return profile for credit investors. What’s striking is the sterling credit market, which has minimal exposure to global tech, with indices carrying less than 2% exposure to the sector.

Figure 1: Index technology exposure varies enormously

Source: RLAM. Charts shows technology exposure as proportion of total market index as at end February 2026. Indices used are MSCI World (global equities), ICE BofA US Corporate Index (US dollar credit), iBOXX Sterling Non-Gilts All Maturity (sterling credit)

The sterling bond market’s materially more limited exposure to this segment, while previously used as demonstration of lower opportunity amid ‘boring’ accusations, is suddenly feeling like a welcomingly natural buffer against equity and geopolitical volatility.

The tech sector, as well as becoming deeply intertwined with the mushrooming growth of private credit markets, has grown its indebtedness to match supersonic expansion in equity valuations that are less tangible and more sentiment‑driven. This leaves credit worthiness and performance inextricably linked to the whims of equity markets and elevated multiples that will ultimately require actual delivery of future cash flow expectations.

Private credit: growing angst

Another growing concern for markets is private credit. Post financial crisis, regulations to discourage this lending by banks has fuelled exponential growth by private credit institutions, enticed by ‘easy’ returns from higher yields and lower perceived volatility. Yet concern over this asset class has been mounting, focused on the following three key areas:

• Private credit ratings are increasingly obtained from less established agencies, with resulting potential for rating inflation and ‘gaming’
• Portfolios may naturally include a higher weighting to businesses with the most extreme equity multiples, such as software companies, as the rising motivation to lend has been satisfied in areas where there is the rising motivation to borrow
• A glut of capital has chased deals – compressing spreads and weakening underwriting discipline, coupled with inherent opacity and lags in published valuations

Growing focus on these risks has combined with an increased push from institutional markets to retail investors, with funds offering the perception of liquidity in an inherently illiquid asset class. The result is a segment of the market more vulnerable to the vicious spiral of rising redemptions, liquidity mismatches, lagged valuation resets and credit restriction. And redemptions at US private credit funds have been rising sharply. This is a predictable and self-perpetuating outcome.

A smaller pond, fewer ripples

Again, sterling credit markets are well insulated from this sector; not only does the index have no direct exposure to private credit funds, but indirect exposure through the financial system is much more constrained. As highlighted by Lloyds Bank’s CEO[1], UK banks are primarily exposed through fund financing, and even then, in a highly selective manner. This contrasts with the more aggressive posture seen in parts of the US banking and non‑bank financial system, where private credit has become a core growth engine. In our view, the more conservative stance taken by UK banks reduces systemic vulnerability.

While UK insurers do participate more actively in private credit markets, their portfolios are more naturally anchored by long-term real assets such as social housing, infrastructure and property. While not immune to economic and market headwinds, these assets generally offer greater comparability, more tangible backing, and predictable cash flows; qualities that are increasingly prized as private credit markets face redemption pressures and valuation scrutiny.

UK regulation: a sensible seatbelt, not a shield

A subtle but important distinction lies in the regulatory environment. UK regulated insurers operate under a more conservative framework, which naturally limits the scale and speed at which financial engineering can develop. It doesn’t eliminate innovation, it simply keeps it more grounded.

In the US, by contrast, insurers make widespread use of Funding Agreement‑Backed Notes (FABNs), enabling the creation of larger pools of private capital and more complex balance‑sheet structures. Combined with the increasing use of Private Letter Ratings, this can heighten risks for investors who delegate the risk assessment of FABNs to rating agencies following prescribed rating methods.

Sterling markets, by virtue of both regulation and their smaller overall exposure to these instruments, are simply less entangled in this ecosystem; not immune, but less exposed.

Still diversified. Still disciplined. Still boring.

With its materially lower tech and private credit exposures, we believe that the sterling credit market is relatively well positioned against current market concerns, but disciplined credit selection and issuer‑level diligence remain a vital ingredient to managing credit portfolios. And the age-old credit protections of effective diversification and under-appreciated bond security, both of which are central planks of our credit philosophy, remain as valid as ever.

The future has always been uncertain and credit returns have always been skewed to the downside – a combination which should always have meant that when it comes to credit, boring isn’t just good, it’s vital.”

Having managed credit strategies for over three decades, through numerous economic and political cycles, we have never lost sight of the fundamental truths of credit investing. The future has always been uncertain and credit returns have always been skewed to the downside – a combination which should always have meant that when it comes to credit, boring isn’t just good, it’s vital. While this has recently been used as a criticism from certain quarters to undermine the relevance of the sterling credit market, we are perfectly happy reminding people just how boring they are!

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied. 

(1) Morgan Stanley European Financials Conference, March 2026