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Barrow Hanley Credit Partners Monthly Market Update | Credit Markets Navigate Volatility as Rates Move Higher

In this post:

2.12.2026
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Executive Summary

  • Credit markets navigated elevated macro and political uncertainty, with higher rates pressuring yields while risk assets remained resilient.
  • High yield and loans diverged during the month as technology and software-related concerns drove volatility within credit.
  • Structural features and positioning helped differentiate credit exposures, with CLOs showing relatively limited sensitivity to software risk.

MARKET RECAP

2026 started off with macro and geopolitical issues driving the market. President Donald Trump directed U.S. military forces to capture Venezuelan President Nicolás Maduro, who was then taken into federal custody to face narcoterrorism charges in a New York federal court. Trump also voiced public support for protestors demanding regime change in Iran while threatening new tariffs on Europe over his continued interest in acquiring Greenland. On the last day of the month, Trump nominated Kevin Warsh to be the next Fed president. Taken together, these developments continued to pressure rates higher. 10-year rates ended the month at 4.24% after closely approaching 4.3%, well off the recent low of 3.95% in October 2025. Despite elevated uncertainty, risk assets performed very well. Equities were higher on average, with small caps outperforming large caps. The Mag 7 outperformed large caps but could not keep up with small caps during January.  Earnings expectations continued to be revised higher, which helped pull equity markets higher. Certain themes are increasingly discussed by in policy and market commentary. Inflation is a key theme, among others, that we have addressed in past letters.

This month, Gavekal examined the disconnect between structural macroeconomic shifts and current market pricing:

“The world is changing, but investors asset allocations do not yet reflect the transformation.  Fiscal and monetary policy settings have been fundamentally altered by COVID and the subsequent reopening boom.  At the same time, geopolitical changes are pushing Europe and China to gear future policies towards greater reliance on domestic demand and innovation.  As a result, inflation and interest rates are not going to revert to their pre-COVID ‘normal’.  Yet this shift has barely been reflected in bond markets, exchange rates, or equity valuations, argues Anatole Kaletsky. First, US bond market pricing implies that average inflation will be in line with the Federal Reserve’s target over the coming years.  With structural and cyclical forces both pointing to an inflationary environment, current inflation expectations are certainly wrong, writes Anatole. Second, with governments pursuing expansionary fiscal policies and central bankers on board with the expansion, growth expectations are also too low. Third, with the US stock market no longer massively outperforming, the belief in American exceptionalism implied by US equity valuations is likely to take another knock in 2026. And fourth, given this macro and market backdrop, US growth stocks are wildly overpriced relative to non-US value plays.”

In its Major Themes for 2026 publication this month, Strategas highlighted risks around commodities and inflation:

“One of the things we find somewhat troubling about current market and policy thinking is that there is an excessive focus on short-term trends in inflation as opposed to the long-term impact of fiscal insobriety and rising aggregate debt levels among developing countries. An increase in productivity can relieve economies of inflationary pressures associated with such circumstances, but historically, it has been far more likely for an economy to try to inflate its way out of such challenges. This is far easier politically.  Gold rallied 65% which many view as a sign of speculation as opposed to some signal that foreign central banks and the global elite are starting to hedge the potentially ruinous impact inflation can have on financial assets by buying hard assets. US Dollar has weakened vs gold; gold has rallied versus all major fiat currencies. ‘History is ripe with examples of superpowers that have spent more on debt service than on defense and subsequently were no longer super or powerful. That’s exactly the position the US is in today,’ Sir Niall Ferguson, Senior Fellow at Stanford University.”

StoneX noted in recent commentary:

“The Federal Reserve’s dovishness is abnormal: 2026 rate hikes are priced in Japan, Canada, the UK, Australia, New Zealand and even Europe. A politicized Fed may wait for the midterm election to deliver the bad news: the December 2026 and January 2027 Fed Funds futures contracts will likely respond the most to bad inflation prints next year.”

HIGH YIELD

High Yield returned +0.48% during the month. Both BBs and Single-Bs were up +0.50%, with CCCs up +0.25%.  Yields ended at 6.74%, 12bps wider than the start of the month.  Spreads widened during the month to 300bps or +4bps.  HY Spreads reached a post-COVID low of 274bps (6.49% yield) on January 22nd before ending the month higher.  HY was up 0.70% for the month on January 22nd before giving back 22bps amid concerns around software business models, particularly the potential impact of AI.  Technology, and software in particular, drove much of the volatility during the month. The HY technology sector declined 1.00%. HY technology is not a significant component of the index, accounting for just 5%. Flows for HY were negative $1.3bn, reversing strong 2025 positive flows.

LOANS

Loans underperformed other asset classes generating a -0.26% return, the first loss since Liberation Day pushed April 2025 negative.  BB Loans were positive +0.23% while Single-B loans were -0.27%, and CCC loans declined -1.87%.  The 3-year Yield-to-Maturity ended the month at 8.15%, higher by 29bps with spreads at 480bps, higher by 25bps. Rate expectations inched higher by 5bps during the month, helping to increase Loan forward yields.  Fears about potential negative impacts of AI on software also reverberated throughout the Loan market. The worst performing industry within Loans was technology, down -2.16%, underperforming the second worst industry performance by 130bps. Technology has become the largest sector within the loan asset class, accounting for 17.28% of the index, which pressured overall index-level returns in January. Loans saw +$2.3bn of inflows on top of strong 2025 inflows.  This is a notable difference from 2022 and 2023, when loans saw outflows.  This may indicate that investors are seeking to keep duration risk low in portfolios.

CLOs

We can drill further within the technology sector of the loan index to determine that, on average, broadly syndicated loan (BSL) CLOs have less exposure to software than the overall loan asset class. The loan index has four levels of Global Industry Classification Standard (GICS) and level three is narrowly defined by primary revenue source. Software GICS Level III is 12.6% of the loan index and on average 11.1% of BSL CLOs.  Among managers there is decent dispersion of exposure to software, falling between 5% and 15% with fewer than 10% exceeding 15% exposure.  Our portfolios skew towards the lower end of that range, and we have been called out in certain third-party research as well positioned. While the current uncertainty presents risks within the software subsector, the BSL CLO structure is uniquely positioned to take advantage of well-positioned tradable credits for CLO managers who enter a period of volatility under-exposed.  We are currently assessing when and where to potentially increase exposure to businesses with more defense and opportunities in an AI world.

PRIVATE CREDIT

Business Development Companies (BDCs) present one of the most public ways of determining private credit’s exposure to software, and the average of software exposure across BDCs is 20% as of 3Q25 according to Pitchbook.  Using a sample of 32 BDCs and Pitchbook’s own narrow classifications of exposures to software, 24 (75%) have exposure greater than 15% with nine (28%) greater than 30%.  Two have greater than 50% exposure.   Other subsectors for which BDCs report exposure may also contain companies that sell software services and these are not included in the data and could also be exposed to AI risks and opportunities. For example, Pitchbook classifies 14% of the exposure of one of the aforementioned BDCs as “Healthcare Technology Systems” which would be additive to the exposures above. One structural limitation of private credit that offsets its traditionally higher yield is the inability to easily trade the asset class to optimize a portfolio to take advantage of market volatility.

BH Strategy Returns Mo QTD 1 Year 3 Year 5 Year 10 Year 20 Year Since Inception
High Yield Composite Gross 0.71 0.71 8.80 10.24 5.96 7.42 6.81 6.69
High Yield Composite Net 0.67 0.67 8.28 9.72 5.46 6.90 6.30 6.18
Bank Loan Composite Gross 0.36 0.36 6.71 9.95 7.42 -- -- 6.60
Bank Loan Composite Net 0.31 0.31 6.18 9.40 6.88 -- -- 6.07
Asset Class Mo QTD YTD Index
HY Return0.48%0.48%0.48%ICE BAML HY Index
HY BB Return0.50%0.50%0.50%ICE BAML BB HY Index
HY B Return0.50%0.50%0.50%ICE BAML B HY Index
HY CCC Return0.25%0.25%0.25%ICE BAML CCC HY Index
Leveraged Loan Return-0.26%-0.26%-0.26%S&P UBS Leveraged Loan Index
LL BB Return0.23%0.23%0.23%S&P UBS Leveraged Loan BB Index
LL B Return-0.27%-0.27%-0.27%S&P UBS Leveraged Loan B Index
LL CCC Return-1.87%-1.87%-1.87%S&P UBS Leveraged Loan CCC Index
HYG0.61%0.61%0.61%Ishares Iboxx High Yield
BKLN-0.73%-0.73%-0.73%Invesco Senior Loan ETF
S&P 500 Return1.45%1.45%1.45%S&P 500
Russell 2000 Return5.35%5.35%5.35%Russell 2000 Index
10yr Beg4.17%4.17%4.17%10yr Treasury
10yr End4.24%4.24%4.24%10yr Treasury
10yr Return-0.27%-0.27%-0.27%10yr Treasury
Beg Mo Beg QTD Beg Year End of Month
HY YTW6.62%6.62%6.62%6.74%
HY BB YTW5.55%5.55%5.55%5.63%
HY B YTW6.78%6.78%6.78%6.94%
HY CCC YTW12.57%12.57%12.57%12.56%
HY STW296 bps296 bps296 bps300 bps
HY BB STW186 bps186 bps186 bps187 bps
HY B STW315 bps315 bps315 bps324 bps
HY CCC STW892 bps892 bps892 bps883 bps
LL YT3Y7.86%7.86%7.86%8.15%
LL BB YT3Y5.79%5.79%5.79%5.96%
LL B YT3Y7.42%7.42%7.42%7.71%
LL CCC YT3Y17.95%17.95%17.95%18.44%
LL ST3Y455 bps455 bps455 bps480 bps
LL BB ST3Y247 bps247 bps247 bps259 bps
LL B ST3Y410 bps410 bps410 bps435 bps
LL CCC ST3Y1471 bps1471 bps1471 bps1516 bps

Source: Barrow Hanley. Returns represent an asset-weighted composite of all Bank Loan Fixed Income portfolios or High Yield Fixed Income portfolios. Index returns are shown before transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule. Past performance is not indicative of future results. Inception Date for Bank Loans is June 1, 2018. Inception Date for High Yield is January 1, 2005.

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ABOUT BARROW HANLEY GLOBAL INVESTORS

Barrow Hanley is a diversified investment management firm offering value-focused investment strategies spanning global equities and fixed income. Recognized as one of the few remaining firms dedicated exclusively to value investing, Barrow Hanley enjoys a boutique culture with a singular focus to assist clients in meeting their investment objectives. Today, Barrow  Hanley has approximately 100 employees, over half of which are investment professionals managing assets for our valued clients. Barrow Hanley stewards the capital of corporate, public, multi-employer pension plans, mutual funds, endowments and foundations, and sovereign wealth funds across North America, Europe, Asia, Australia and Africa. For further information, please visit www.barrowhanley.com.

General Disclosures:

All opinions included in this report constitute Barrow Hanley’s (BH) judgment as of the time of issuance of this report and are subject to change without notice. This report was prepared by Barrow Hanley with information it believes to be reliable. This report is for informational purposes only and is not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any security, nor a recommendation of services supplied by any money management organization. Past performance is not indicative of future results. Barrow Hanley is a value-oriented investment manager, providing services to institutional clients.

Barrow Hanley Credit Partners® is a legally assumed name for the Alternative Credit investment team and investment strategies of Barrow Hanley Global Investors®, including Bank Loan Fixed Income, Collateralized Loan Obligations, and High Yield Fixed Income.

These investment summaries are provided for informational purposes only and should not be viewed as representative of all investments by the firm. This report includes certain “forward-looking statements” including, but not limited to, BH’s plans, projections, objectives, expectations, and intentions and other statements contained herein that are not historical facts as well as statements identified by words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, or words of similar meaning. Such statements and opinions contained are based on BH’s current beliefs or expectations and are subject to significant uncertainties and changes in circumstances, many beyond BH’s control. Actual results may differ materially from these expectations due to changes in global, political, economic, business, competitive, market, and regulatory factors. Additional information regarding the strategy is available upon request.

Index Disclosures:

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg’s licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Credit Suisse Index data is permissible for use by Barrow Hanley for client reporting and marketing purposes. This data is not permitted to be re-distributed.

Merrill Lynch index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Barrow Hanley Global Investors. ICE Data and its Third Party Suppliers accept no liability in connection with its use.

Standard and Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC, and these trademarks have been licensed for use by S&P and Dow Jones Indices LLC and S&P Dow Jones Indices LLC. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Barrow Hanley. S&P Dow Jones Indices LLC is not responsible for the formatting or configuration of this material or for any inaccuracy in Barrow Hanley’s presentation thereof.

Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Barrow Hanley. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Barrow Hanley’s presentation thereof.

Please contact us for more information.

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www.barrowhanley.com

2.12.2026
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MARKET RECAP

2026 started off with macro and geopolitical issues driving the market. President Donald Trump directed U.S. military forces to capture Venezuelan President Nicolás Maduro, who was then taken into federal custody to face narcoterrorism charges in a New York federal court. Trump also voiced public support for protestors demanding regime change in Iran while threatening new tariffs on Europe over his continued interest in acquiring Greenland. On the last day of the month, Trump nominated Kevin Warsh to be the next Fed president. Taken together, these developments continued to pressure rates higher. 10-year rates ended the month at 4.24% after closely approaching 4.3%, well off the recent low of 3.95% in October 2025. Despite elevated uncertainty, risk assets performed very well. Equities were higher on average, with small caps outperforming large caps. The Mag 7 outperformed large caps but could not keep up with small caps during January.  Earnings expectations continued to be revised higher, which helped pull equity markets higher. Certain themes are increasingly discussed by in policy and market commentary. Inflation is a key theme, among others, that we have addressed in past letters.

This month, Gavekal examined the disconnect between structural macroeconomic shifts and current market pricing:

“The world is changing, but investors asset allocations do not yet reflect the transformation.  Fiscal and monetary policy settings have been fundamentally altered by COVID and the subsequent reopening boom.  At the same time, geopolitical changes are pushing Europe and China to gear future policies towards greater reliance on domestic demand and innovation.  As a result, inflation and interest rates are not going to revert to their pre-COVID ‘normal’.  Yet this shift has barely been reflected in bond markets, exchange rates, or equity valuations, argues Anatole Kaletsky. First, US bond market pricing implies that average inflation will be in line with the Federal Reserve’s target over the coming years.  With structural and cyclical forces both pointing to an inflationary environment, current inflation expectations are certainly wrong, writes Anatole. Second, with governments pursuing expansionary fiscal policies and central bankers on board with the expansion, growth expectations are also too low. Third, with the US stock market no longer massively outperforming, the belief in American exceptionalism implied by US equity valuations is likely to take another knock in 2026. And fourth, given this macro and market backdrop, US growth stocks are wildly overpriced relative to non-US value plays.”

In its Major Themes for 2026 publication this month, Strategas highlighted risks around commodities and inflation:

“One of the things we find somewhat troubling about current market and policy thinking is that there is an excessive focus on short-term trends in inflation as opposed to the long-term impact of fiscal insobriety and rising aggregate debt levels among developing countries. An increase in productivity can relieve economies of inflationary pressures associated with such circumstances, but historically, it has been far more likely for an economy to try to inflate its way out of such challenges. This is far easier politically.  Gold rallied 65% which many view as a sign of speculation as opposed to some signal that foreign central banks and the global elite are starting to hedge the potentially ruinous impact inflation can have on financial assets by buying hard assets. US Dollar has weakened vs gold; gold has rallied versus all major fiat currencies. ‘History is ripe with examples of superpowers that have spent more on debt service than on defense and subsequently were no longer super or powerful. That’s exactly the position the US is in today,’ Sir Niall Ferguson, Senior Fellow at Stanford University.”

StoneX noted in recent commentary:

“The Federal Reserve’s dovishness is abnormal: 2026 rate hikes are priced in Japan, Canada, the UK, Australia, New Zealand and even Europe. A politicized Fed may wait for the midterm election to deliver the bad news: the December 2026 and January 2027 Fed Funds futures contracts will likely respond the most to bad inflation prints next year.”

HIGH YIELD

High Yield returned +0.48% during the month. Both BBs and Single-Bs were up +0.50%, with CCCs up +0.25%.  Yields ended at 6.74%, 12bps wider than the start of the month.  Spreads widened during the month to 300bps or +4bps.  HY Spreads reached a post-COVID low of 274bps (6.49% yield) on January 22nd before ending the month higher.  HY was up 0.70% for the month on January 22nd before giving back 22bps amid concerns around software business models, particularly the potential impact of AI.  Technology, and software in particular, drove much of the volatility during the month. The HY technology sector declined 1.00%. HY technology is not a significant component of the index, accounting for just 5%. Flows for HY were negative $1.3bn, reversing strong 2025 positive flows.

LOANS

Loans underperformed other asset classes generating a -0.26% return, the first loss since Liberation Day pushed April 2025 negative.  BB Loans were positive +0.23% while Single-B loans were -0.27%, and CCC loans declined -1.87%.  The 3-year Yield-to-Maturity ended the month at 8.15%, higher by 29bps with spreads at 480bps, higher by 25bps. Rate expectations inched higher by 5bps during the month, helping to increase Loan forward yields.  Fears about potential negative impacts of AI on software also reverberated throughout the Loan market. The worst performing industry within Loans was technology, down -2.16%, underperforming the second worst industry performance by 130bps. Technology has become the largest sector within the loan asset class, accounting for 17.28% of the index, which pressured overall index-level returns in January. Loans saw +$2.3bn of inflows on top of strong 2025 inflows.  This is a notable difference from 2022 and 2023, when loans saw outflows.  This may indicate that investors are seeking to keep duration risk low in portfolios.

CLOs

We can drill further within the technology sector of the loan index to determine that, on average, broadly syndicated loan (BSL) CLOs have less exposure to software than the overall loan asset class. The loan index has four levels of Global Industry Classification Standard (GICS) and level three is narrowly defined by primary revenue source. Software GICS Level III is 12.6% of the loan index and on average 11.1% of BSL CLOs.  Among managers there is decent dispersion of exposure to software, falling between 5% and 15% with fewer than 10% exceeding 15% exposure.  Our portfolios skew towards the lower end of that range, and we have been called out in certain third-party research as well positioned. While the current uncertainty presents risks within the software subsector, the BSL CLO structure is uniquely positioned to take advantage of well-positioned tradable credits for CLO managers who enter a period of volatility under-exposed.  We are currently assessing when and where to potentially increase exposure to businesses with more defense and opportunities in an AI world.

PRIVATE CREDIT

Business Development Companies (BDCs) present one of the most public ways of determining private credit’s exposure to software, and the average of software exposure across BDCs is 20% as of 3Q25 according to Pitchbook.  Using a sample of 32 BDCs and Pitchbook’s own narrow classifications of exposures to software, 24 (75%) have exposure greater than 15% with nine (28%) greater than 30%.  Two have greater than 50% exposure.   Other subsectors for which BDCs report exposure may also contain companies that sell software services and these are not included in the data and could also be exposed to AI risks and opportunities. For example, Pitchbook classifies 14% of the exposure of one of the aforementioned BDCs as “Healthcare Technology Systems” which would be additive to the exposures above. One structural limitation of private credit that offsets its traditionally higher yield is the inability to easily trade the asset class to optimize a portfolio to take advantage of market volatility.

BH Strategy Returns Mo QTD 1 Year 3 Year 5 Year 10 Year 20 Year Since Inception
High Yield Composite Gross 0.71 0.71 8.80 10.24 5.96 7.42 6.81 6.69
High Yield Composite Net 0.67 0.67 8.28 9.72 5.46 6.90 6.30 6.18
Bank Loan Composite Gross 0.36 0.36 6.71 9.95 7.42 -- -- 6.60
Bank Loan Composite Net 0.31 0.31 6.18 9.40 6.88 -- -- 6.07
Asset Class Mo QTD YTD Index
HY Return0.48%0.48%0.48%ICE BAML HY Index
HY BB Return0.50%0.50%0.50%ICE BAML BB HY Index
HY B Return0.50%0.50%0.50%ICE BAML B HY Index
HY CCC Return0.25%0.25%0.25%ICE BAML CCC HY Index
Leveraged Loan Return-0.26%-0.26%-0.26%S&P UBS Leveraged Loan Index
LL BB Return0.23%0.23%0.23%S&P UBS Leveraged Loan BB Index
LL B Return-0.27%-0.27%-0.27%S&P UBS Leveraged Loan B Index
LL CCC Return-1.87%-1.87%-1.87%S&P UBS Leveraged Loan CCC Index
HYG0.61%0.61%0.61%Ishares Iboxx High Yield
BKLN-0.73%-0.73%-0.73%Invesco Senior Loan ETF
S&P 500 Return1.45%1.45%1.45%S&P 500
Russell 2000 Return5.35%5.35%5.35%Russell 2000 Index
10yr Beg4.17%4.17%4.17%10yr Treasury
10yr End4.24%4.24%4.24%10yr Treasury
10yr Return-0.27%-0.27%-0.27%10yr Treasury
Beg Mo Beg QTD Beg Year End of Month
HY YTW6.62%6.62%6.62%6.74%
HY BB YTW5.55%5.55%5.55%5.63%
HY B YTW6.78%6.78%6.78%6.94%
HY CCC YTW12.57%12.57%12.57%12.56%
HY STW296 bps296 bps296 bps300 bps
HY BB STW186 bps186 bps186 bps187 bps
HY B STW315 bps315 bps315 bps324 bps
HY CCC STW892 bps892 bps892 bps883 bps
LL YT3Y7.86%7.86%7.86%8.15%
LL BB YT3Y5.79%5.79%5.79%5.96%
LL B YT3Y7.42%7.42%7.42%7.71%
LL CCC YT3Y17.95%17.95%17.95%18.44%
LL ST3Y455 bps455 bps455 bps480 bps
LL BB ST3Y247 bps247 bps247 bps259 bps
LL B ST3Y410 bps410 bps410 bps435 bps
LL CCC ST3Y1471 bps1471 bps1471 bps1516 bps

Source: Barrow Hanley. Returns represent an asset-weighted composite of all Bank Loan Fixed Income portfolios or High Yield Fixed Income portfolios. Index returns are shown before transaction costs, management fees, and other expenses. Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule. Past performance is not indicative of future results. Inception Date for Bank Loans is June 1, 2018. Inception Date for High Yield is January 1, 2005.

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