Active management matters more in today's credit markets Finding income opportunities in a more selective environment

For much of the past decade, credit investors benefited from powerful tailwinds. Interest rates moved lower, central bank support was abundant, and credit spreads generally trended tighter over time. In that environment, simply owning the market often proved sufficient to generate attractive returns.

Today’s market looks different. While total expected yields remain compelling, credit spreads remain below long-term averages despite ongoing uncertainty surrounding inflation, monetary policy, and economic growth. At the same time, interest rate volatility, as measured by the MOVE Index, remains elevated relative to much of the post-global financial crisis period. The result is a growing disconnect between credit valuations and the risks investors face (Figure 1).

The easy credit environment is over

While broad credit spreads remain relatively tight, conditions beneath the surface have become far less uniform. The gap between CCC- and BB-rated spreads has widened to near historical extremes, ranking in the top 1% of observations for both leveraged loans and high yield bonds over the past 15 years (Figure 2). This divergence suggests investors are drawing a sharper distinction between issuers with strong fundamentals and those facing greater refinancing, earnings, or balance-sheet risks.

As differences across issuers become more pronounced, security selection may play a larger role in driving outcomes. When quality tiers trade in a narrow range, broad market exposure can capture much of the available opportunity. But when dispersion reaches these levels, avoiding a small number of deteriorating credits can matter more to returns than the direction of the asset class itself.

For active managers, wider dispersion may create opportunities to identify attractive relative value opportunities while remaining selective about where credit risk is taken.

Why selectivity matters more today

As sector dispersion widens, future returns may depend less on broad market beta and more on the ability to identify relative value opportunities, avoid deteriorating credits, and dynamically allocate capital across sectors. In this environment, active management can play an increasingly important role.

Unlike highly efficient public equity markets, many areas of credit remain research intensive and less efficiently priced. Security selection, risk management, and portfolio construction can have a meaningful impact on investor outcomes.

This is particularly true in today’s market, where elevated dispersion has created significant performance differences among issuers and sectors. Active managers with deep research capabilities, broad market access, and disciplined risk controls may be better positioned to identify compelling opportunities while avoiding deteriorating credits.

Blackstone Credit & Insurance brings these capabilities to both the State Street® Blackstone Senior Loan ETF (SRLN) and the State Street® Blackstone High Income ETF (HYBL), combining one of the industry's largest credit research platforms with broad primary-market access and proprietary analytics to identify relative value opportunities across market cycles.

SRLN: Floating-rate income for a higher-for-longer world

For investors concerned about interest rate uncertainty, senior loans may offer a compelling solution. Unlike traditional fixed-rate bonds, senior loans generally feature floating-rate coupons that reset as interest rates change. As a result, the asset class has historically demonstrated low duration and reduced sensitivity to rising rates relative to traditional fixed income.²

SRLN provides actively managed exposure to senior loans through Blackstone's extensive loan management platform. The strategy focuses on delivering potential income while maintaining a quality bias designed to help manage downside risk.

Beyond their floating-rate characteristics, senior loans occupy a senior secured position within a company’s capital structure. Historically, this seniority has contributed to higher recovery rates than many other forms of sub-investment-grade credit.³ Combined with their yields and relatively low volatility, these characteristics have allowed senior loans, and SRLN specifically, to provide a compelling level of income potential per unit of risk relative to several traditional fixed income sectors (Figure 3).

HYBL: Active multi-sector credit designed for today’s market

While SRLN provides targeted exposure to floating-rate loans, HYBL offers a broader approach to credit investing.

HYBL is an actively managed multi-sector credit strategy that dynamically allocates across high yield bonds, senior loans, and CLOs. Rather than relying on a single source of return, the strategy seeks to identify compelling risk-adjusted opportunities across credit markets as conditions evolve.

This flexibility may be particularly valuable in an environment characterized by elevated dispersion and tighter spreads. Different segments of the credit market can outperform at different points in the cycle, and HYBL’s flexible mandate allows Blackstone to adjust allocations based on relative value opportunities.
Since its inception, this approach has enabled HYBL to deliver a higher yield with lower volatility relative to peers, resulting in more yield per unit of volatility (Figure 4).

Two active solutions for a more selective credit market

Tight spreads, elevated volatility, and wider dispersion across sectors and issuers have created an environment where active management may have a meaningful impact on outcomes.

SRLN and HYBL combine Blackstone Credit & Insurance’s deep credit research, primary-market access, and disciplined portfolio management to identify relative value opportunities across the credit landscape.

For investors seeking an active approach to credit, SRLN and HYBL offer two distinct investment solutions:

• SRLN offers a focused, floating-rate answer for investors most concerned about rate uncertainty, pairing low interest-rate duration with the recovery-rate cushion of senior secured lending.
• HYBL offers breadth, allocating dynamically across high yield, senior loans, and CLOs to pursue the best risk-adjusted opportunity wherever it sits in the cycle.

SRLN offers precision. HYBL offers flexibility.

In a market where selectivity may matter more than broad market exposure, these two strategies provide complementary ways to pursue income opportunities through active credit management.