““When you’re three days down the highway
And you’re looking like I feel
And it takes a lot to keep it going
It takes a lot to keep it real
Take some time for yourself
And learn to yield”
(From “Yield” by the Indigo Girls, 2002)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
The public bond market has been remarkably quiet for much of the past year. We might even argue that the market has been somewhat complacent – seemingly ignoring significant economic and political events.
We are not alone in wondering about this complacency. On January 16, Bloomberg Daily Markets posted two separate articles, one entitled, “Complacency in Credit” and the other entitled, “Someone Wake up the Treasury Bond Traders”.[1]
[NOTE: As we write this, President Trump recently threatened to raise tariffs on European countries he believes are objecting to his annexation of Greenland. Politics aside, this news certainly jolted the global bond markets out of any sense of complacency – at least temporarily.]
Despite the recent dormancy. the rates and credit markets matter. We have been around long enough to remember when the “bond vigilantes” made their opinions clear about political and economic policy and drove rates and spreads up or down accordingly.
We believe it still matters to know what is happening in the bond markets. Not just for bond investors themselves, but for what macro information we might glean from how the bond market is reacting to current events. We believe this can help us make better overall investment decisions.
Let’s Start with Rates
After hitting a peak of roughly 4.80% in mid-January of 2025, the 10-year Treasury rate drifted slowly downward to a low of just under 4% in mid-October and has been range-bound between 4.00% – 4.20% ever since (excluding the “post-Greenland” volatility over the Martin Luther King Jr. Day weekend).
This quiescence has occurred despite higher than Fed-targeted inflation, unsettling geopolitical events, continuing uncertainties over trade and tariff policies, rising concerns over the level of the Federal debt and deficits, and the potential of yet another government shutdown at the end of this month.
Here is the yield curve since January 1, 2025. We see it has resumed its more “normal” upward slope but still remains somewhat flat as the market seems to be pricing in lower probabilities of continued rate cuts by the Fed.
Source: Ycharts, data from January 1, 2025 – January 16, 2026. You cannot invest in an index and past performance is no guarantee of future results.
As another indication of bond market complacency, let’s look at the MOVE index, which is a measure of interest rate volatility over time. It has fallen to its lowest level since October 21, 2021 (i.e., the lowest in more than four years).
(This index spiked after the Greenland “kerfuffle” but has begun to drift back down again.)
Source: The Daily Shot, as of January 15, 2026. You cannot invest in an index and past performance is no guarantee of future results. The MOVE index is a measure of US interest rate volatility, reflecting market expectations for future volatility within the US fixed income market.
Credit Spreads
Next, let’s take a look at credit spreads. In the public markets, we see that both investment grade and high yield spreads are at the tightest levels they have been in ten years.
Source: Ycharts, 10-year data through January 15, 2026. You cannot invest in an index and past performance is no guarantee of future results.
We believe current investor coupons are relatively safe, as many companies took advantage of the low-interest rate environment of a few years ago and refinanced their debt.
Given where rates and spreads are currently trading, however, and what we believe will be upward pressure on both as we move through the year, we remain cautious about the total return potential of the public income markets.
This view is shared by Goldman Sachs in its most recent 2026 Outlook.
Source: The Goldman Sachs 2026 Outlook, January 2026. You cannot invest in an index and past performance is no guarantee of future results.
Further, with only ~60-bps difference between the 2-year and 10-year Treasury rate, there is little incentive to take on excessive duration (interest rate) risk.
We continue to recommend a “barbell” approach of balancing shorter and longer duration instruments to generate an appropriate level of yield without taking on unnecessary duration risk.
Source, WisdomTree, as of January 16, 2026. You cannot invest in an index and past performance is no guarantee of future results.
Numbers Behind the Numbers
Now, let’s look at some of the “numbers behind the numbers.”
Credit Upgrades and Downgrades
According to S&P Global Ratings (one of the primary credit ratings agencies), 2025 was generally stable for global debt, with only a slight tilt toward downgrades versus upgrades over the course of the year.
Source: S&P Global Credit Outlook 2026, as of December 3, 2025.
Fitch, another of the primary ratings agencies, shows comparable results for global corporate borrowers, with negative outlooks slightly outweighing positive outlooks.
Source: Fitch Ratings Performance, as of December 31, 2025.
Maturity Wall
With respect to the so-called “maturity wall” – the year that companies will need to refinance currently outstanding debt – borrowers did a respectable job “pushing out” their maturities during the low-interest rate era.
Corporate and financial debt maturity walls are reasonably spaced out over the next several years with relative peaks in 2026 and 2028.
Source: S&P Global, as of December 16, 2024.
High yield debt, however, will see a significant peak in 2028 and will be refinancing into an unknown rate and credit environment.
Source: Charles Schwab, “Will a Maturity Wall Matter for Investors?”, as of June 14, 2024. The chart shows the estimated maturity schedule for corporate high yield bonds in the US. These are estimates and are subject to change as refinancing activity or other corporate actions take place.
Default Rates
According to S&P Global Ratings, global default rates trended downward through September 2025, continuing a three-year trend. Furthermore, default rates are showing signs of stabilization – driven by a generally benign global economy and solid corporate profitability.
Source: S&P Global Ratings, through September 30, 2025.
Interest Coverage Ratios
Hand in hand with default rates are interest coverage ratios. The more of a buffer a company has to cover its interest expenses, the less likely that company is to default.
According to the Federal Reserve, the total of US business and household debt relative to GDP is at its lowest level in over twenty years.
And this translates into an improvement in corporate median-level coverage ratios through Q2 of 2025 (the most recent report).
Source for the previous three charts: The Federal Reserve “Financial Stability Report.” November 2025.
Bankruptcies
Despite a generally benign credit environment, we are seeing an increase in bankruptcies in the US, especially in Q3 2025, when the total jumped to over 24,000. What we believe will be a generally higher rate environment may lead to a continuation of this trend. Much will depend on the continued strength of the US economy.
Source: TradingEconomics, US Bankruptcies, data through Q3, 2025.
Bank Lending
An important part of the US corporate debt market is bank lending (often referred to as “leveraged loans”), which is dominated by smaller, unrated, or non-investment grade borrowers, most frequently on a floating rate basis.
Using information from the April “Financial Stability Report” from the Federal Reserve Bank, we see that, while more bank borrowers have recently taken on more leverage, the number remains low by historical standards.
Further, the default rates by these borrowers remain manageable.
Source for the previous three charts: The Federal Reserve Board, “Financial Stability Report,” as of November 2025.
We see a slightly different picture if we look at consumer loans versus corporate loans.
The first thing we note is that, since Q1 of 2025, personal disposable income has not kept up with inflation (as measured by the Personal Consumption Expenditure Index).
Source: St. Louis Fed (FRED), data through September 2025.
However, consumers have not stopped spending and are increasingly financing that consumption with credit card debt. Following the dip corresponding to the “Liberation Day” tariff announcements, both retail sales and consumer debt have risen steadily (although falling as a percentage of GDP, as noted above).
Source: St. Louis Fed (FRED), retail sales data through November 2025, consumer loan data through January 7, 2026.
With the average credit card rate in excess of 20%, it is no wonder that delinquency rates are rising, though we do see a downward trend over the past several months.
Source: The St. Louis Fed (FRED), 10-year data through Q3, 2025.
The scaling on the right y-axis of this chart (showing delinquency rates) perhaps over-amplifies the issue.
Delinquency rates have risen but do not appear problematic just yet. As a point of comparison, following the Great Financial Crisis of 2008, delinquency rates on credit card loans rose to almost 7%.
That said, the current delinquency rates are higher than the 10-year historical average.
(It will be interesting to see if Trump is successful in getting banks and credit card companies to cap their interest expense at 10%. We have our doubts.)
Following the market scare in 2023 caused by the collapse of Silicon Valley Bank, Signature Bank of New York, and First Republic Bank, banks in general tightened up on lending standards. This was a significant catalyst to the explosion in private credit we witnessed over the previous 3-5 years.
That regime appears to have “normalized” somewhat and banks are lending again, as illustrated both in the increasing total of commercial and industrial loans outstanding and in the declining number of banks indicating they are tightening their lending standards.
Source: The St. Louis Fed (FRED), 5-year data through Q4. 2025.
Commercial Real Estate
One last aspect on the bank lending front to examine is commercial real estate. As a result of Covid, commercial real estate as a sector went into a tailspin due to the rise of “remote work” and correspondingly high vacancy rates.
We are recovering from that, and an increasing number of firms are requiring workers to return to their offices at least several days a week. But the hangover remains for commercial real estate.
Unfortunately, this is the sector where small- and medium-sized banks are most exposed, meaning we may see continuing delinquencies and defaults going forward, especially if rates rise over time. This may continue to put pressure on banks as well as borrowers.
On the flip side, specific sectors of the real estate market are recovering and presenting interesting opportunities in the private real estate space. We have active searches ongoing in a variety of both income- and growth-oriented areas.
Source: Yardeni Research, as of January 7, 2026.
Private Credit
It is impossible to talk about global rates and credit without including a discussion of private credit, which has exploded over the past 5-7 years and is expected to continue to grow exponentially.
Source: The Goldman Sachs 2026 Outlook, January 2026. You cannot invest in an index and past performance is no guarantee of future results.
There are arguments in favor of private credit for investors seeking enhanced yield within their portfolios:
- The primary competitor to private credit in the direct large and middle market lending space is the bank syndicated loan (BSL) space which, after laying fairly dormant for several years following the regional banking crisis of 2023, has revitalized and is expected to grow substantially over the next several years.
Source: Market Research Future, “Syndicated Loan Market,” October 2025. Future growth rates are estimates and subject to change as market conditions change.
- The difference is the ultimate holder of the loan. In the BSL market, the majority of loans are bundled into Collateralized Loan Obligations (CLOs) and sold off to institutional and individual investors. We can see this illustrated in the current and expected growth of the CLO market.
Source: The Business Research Company, “Collateralized Loan Obligation Market Report 2026, January 2026. Future growth rates are estimates and subject to change as market conditions change.
The result is that there is the potential that due diligence is not as robust in the BSL market, since for the most part, the underwriting banks will not be holding the loans to maturity.
We don’t want to overstate this, but a primary difference in the private credit space, other than a small subset of secondary market transactions, is that the underwriters of a given loan tend to hold that loan until maturity or refinancing, and so an argument can be made that the underwriting standards are more stringent.
Three other aspects of private credit are worth highlighting. First is the primary investment vehicle being deployed for private credit, which is the “Evergreen” structure – quasi-liquid vehicles registered under the 1940 Investment Company Act of 1940 (similar to mutual funds and ETFs, but not with daily liquidity).
These vehicles fit the nature of private credit very well – the money is put right to work (i.e., minimal to no “J-curve”), coupons are paid regularly, and the liquidity terms align reasonably closely with the underlying loan structure (but with the potential for “gating” of redemptions if there is excessive demand).
As a result, growth in the AUM of Evergreen private credit facilities is expected to grow substantially over the next several years.
Source: Franklin Templeton “Private Market Outlook 2026”, January 2026. Forward projections are estimates and subject to change.
Second is the variety of lending areas that private credit is penetrating. When the media refers to “private credit,” it usually means PE-sponsored direct large and middle market lending – and that certainly remains the dominant space.
But there is a myriad of other areas to explore. Given what we believe will be increased competition in the direct lending space from increased BSL activity, we are actively investigating these other, less crowded spaces.
Source: Franklin Templeton “Private Market Outlook 2026”, January 2026.
Finally, given the explosive growth of private credit over the past few years, it begs the question of how outstanding loans are performing, and here we see an issue worth paying attention to.
What we do not see is a growing number of “cockroaches” so famously bandied about in the media over the past few months. Default rates remain fairly stable, though we do see an increase in so-called “Liability Management Exercises” (LMEs), which is just another way of saying loan restructuring.
Source: Pitchbook Market Insights, “Leveraged loan default rate eases, though forward-looking distress metrics rise,” November 4, 2025.
We see that LMEs now constitute the majority of distressed loan management, outweighing actual payment defaults. One thing we pay close attention to is the level of “PIK” or payment-in-kind debt (i.e., paying off debt by issuing more debt).
If it is part of the original deal structure, PIK debt can be an acceptable form of debt structuring, but we are watching closely to see if PIK debt is increasingly used as part of an LME, which may signal increased distress by a given borrower.
Source: Pitchbook Market Insights, “Leveraged loan default rate eases, though forward-looking distress metrics rise,” November 4, 2025.
Summary and Interpretation
We remain comfortable with the current rate and credit environment. Balance sheets overall remain in decent shape, we believe rates and spreads will remain range-bound (barring an unforeseen event), and investors can generate real yield in the public markets.
That said, we believe the pressure on both rates and spreads is upward, not downward, and so we continue to believe there is muted total return potential in the public fixed income market.
We have seen an explosion in private credit over the past 5-6 years, and we remain active in this space. This expansion was fueled by commercial banks pulling back on their lending activities over the past several years, forcing unrated borrowers into the private markets.
We prefer private credit for those clients who can access it and are seeking higher yield. We like private credit because we believe it can offer better pricing (yield), due diligence, and deal structure in comparison to the public markets, where many bank loans are not held on the bank’s balance sheet but are bundled together and syndicated into the collateralized loan market.
We do believe the dominant market in private credit – private equity-sponsored direct middle market lending – is getting crowded, and we may be witnessing a decline in pricing, lending standards, and due diligence, as well as the health of existing loans.
An example of this is the increase in “PIK” (“Payment in Kind”) debt, whereby a borrower repays some portion of its outstanding debt by issuing more debt.
It does make a difference whether the PIK debt was part of the original deal structure versus part of the restructuring of an already outstanding loan – the latter being more problematic in our minds.
Regardless, we see a growing percentage of private credit deal structures allowing for the issuance of PIK debt (which does not mean it has been implemented, only allowed).
Source: Houlihan Lokey Private Credit DataBank and TCW, “The Big PIK-ture,” August 2025.
We believe the elevated level of PIK debt was a contributing factor to the credit market meltdown during the Great Financial Crisis back in 2008-2009. So, we are not fans of this trend. But, while the trend is upward sloping and needs to be paid attention to, it does not appear to be problematic at this time.
In any event, we still prefer the private credit market to the public one in the current market environment. Even with the “crowding” of the direct middle market space, quality sponsors and managers are still realizing attractive yields and low default rates.
In addition, we are exploring a variety of less crowded and more specialized spaces where we believe there may be appealing opportunities for diversifying exposure and generating premium yields.
As always, we welcome your questions and feedback.
[1] Bloomberg Daily Markets, January 16, 2026 (subscription required): Credit Markets Haven’t Been This Hot in Two Decades – Bloomberg.