From cash to credit: Taking advantage of the Fed pivot

September 23, 2025

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Despite tight spreads, short-dated US high yield could be set to offer the kind of pickup over risk-free assets usually associated with volatility events, as Vikram Awasthi explains.

Markets are at an important inflection point. After one of the fastest tightening cycles in decades,¹  the Federal Reserve (Fed) has finally resumed rate cuts after being on pause since December 2024 due to stubbornly sticky inflation.²

For investors, this shift in stance could have far-reaching implications across the yield curve as a loosening bias will erode the relative appeal of short-dated US Treasuries and money market funds. We believe the new monetary policy environment could create a particularly compelling backdrop for US short-duration high yield.

Not risk free

From an historical perspective, when the Fed begins cutting rates, the yield curve does not move in unison. While the front end of the curve (T-bills and short-term yields) tends to fall quickly in step with the secured overnight financing rate (SOFR), the long end (10–30-year Treasuries) can be more unpredictable and even drift higher as growth and inflation expectations re-anchor.

This means the ‘safe’ yield investors have enjoyed by parking capital in ‘risk-free’ front-end US Treasuries and money market funds is likely to diminish. In other words, the haven of risk-free carry will lose its appeal. As that cushion compresses, the relative value of corporate fixed income improves, even though spreads are admittedly tight.³

Yield where it matters

One of the most striking features of today’s market is the yield pickup available in short-dated US high yield.4 As the Fed begins to cut, with the goal of bringing the Fed Funds Rate to around 3%, and if the yield in US short duration high yield (based on the ICE BofA  0-3 Year Duration-To-Worst BB-B Cash Pay US High Yield Constrained Index) remains rangebound, the incremental yield over front-end Treasuries would be nearly double. 

Over the last 3 years of elevated front-end US Treasury yields, such ratios have only materialised when investors were seeking shelter due to volatility episodes, not when credit markets were stable. This, in our view, makes the current conditions unusually attractive.⁴

Furthermore, any short-term volatility in risk assets could temporarily widen spreads and create an even better entry point for investors, while the underlying carry remains strong and resilient.

The bigger picture

This is not a typical cycle. In past easing periods, the yield advantage of corporate credit emerged mainly during downturns, when risk appetite was impaired. Today, we are seeing that same comparative advantage while the US economy appears relatively resilient and corporate fundamentals remain sound.

The combination of policy easing, solid fundamentals and powerful relative carry is rare. In our view, this presents strong case for a proactive allocation into US corporate credit now, rather than waiting for spreads to widen or markets to reset. 

References

1.Visual Capitalist, as of 6th October 2022. Comparing the speed of US interest rate hikes (1988-2022)

2.Federal Reserve, as of 17th September 2025.

3.ICE Index Platform, as of 17th September 2025. ICE BofA US Cash Pay High Yield Index (J0A0).

4. Based on ICE BofA 0-3 Year Duration-To-Worst BB-B Cash Pay US High Yield Constrained Index (J4CS), ICE Index Platform, as of 16th September 2025.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of September 2025 and may change without notice.

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Index descriptions

J0A0 - The ICE BofA US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

J4CS - The ICE BofA  0-3 Year Duration-To-Worst BB-B Cash Pay US High Yield Constrained Index tracks the performance of short maturity US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market. Qualifying securities must be rated B3 or higher (based on an average of Moody’s, S&P and Fitch) but caps issuer exposure at 2%, have a duration-to-worst of 3 years or less. Eligible securities must also have at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

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