“Don’t you know which clothes even fit me?
Come on and let me know
Should I cool it, or should I blow?
Should I stay, or should I go now?
Should I stay, or should I go now?
If I go, there will be trouble
And if I stay, it will be double
So come on and let me know
Should I stay or should I go?“
(From “Should I Stay or Should I Go,” by The Clash, 1982)
By Scott Welch, CIMA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
Though it was released in 1982, this iconic song from The Clash perfectly captures the current imbroglio between the Trump administration and the Fed, especially Chairman Powell. In our opinion it is somewhat of a distraction, but it certainly is soaking up media attention in what are normally “the dog days of summer.”
Other than the noise surrounding the Fed, the bond market has been quiet for most of this year and is therefore often overlooked by investors and the media. We might even make the argument that the market has been somewhat complacent – seemingly ignoring significant economic and political events.
But 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.
Those days seem to be dormant, for now, but 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
The yield curve has been remarkably quiescent this year, hardly reacting to various news regarding the Fed, tariffs, the economy, and geopolitical tensions.
Here is the yield curve over the past three years. We see that it has resumed its almost “flat” shape, with minimal difference between the short and long ends of the curve.
Source: Ycharts, 3-year data as of July 23, 2025. You cannot invest in an index and past performance is no guarantee of future results.
We can see the current market complacency clearly if we look at how rates have traded over the course of 2025. Other than small blips around the “Liberation Day” tariff announcements in April and the bombing of Iran in July, the yield curve has hardly moved.
Source: Ycharts, YTD data as of July 23, 2025. 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. We see it trending steadily downward since the “Liberation Day” spike back in early April.
Source: TradingView, the ICE BoAML “MOVE” index, as of July 23, 2025. 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.
Source: Ycharts, 5-year data through July 23, 2025. You cannot invest in an index and past performance is no guarantee of future results.
Other than the short-term spike following “Liberation Day” in April, we see that spreads are as tight as they have been for most of the past five years.
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.
That said, given where rates and spreads are currently trading, 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.
Further, there is very little incentive to take on duration (interest rate). There simply is not enough yield differential between the short and long ends of the curve.
Source, WisdomTree, as of July 22, 2025. You cannot invest in an index and past performance is no guarantee of future results.
Numbers Behind the Numbers
Now, let’s look at the “numbers behind the numbers.”
Upgrades and Downgrades
According to S&P Global Ratings (one of the primary credit ratings agencies), 2025 has seen a generally positive “net rating action” (upgrades minus downgrades), but downgrades have increased, especially in high yield bonds.
Source: S&P Global Ratings, as of June 16, 2025.
In addition, there was a specific uptick in downgrades in the second quarter following the “Liberation Day” tariff announcements. It is interesting to note that credit spreads did not move much in response.
Source: S&P Global Ratings, as of June 16, 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.
Source: Apollo Academy, “2025 Economic Outlook: Firing on all Cylinders,” by Torsten Slok, Apollo Chief Economist, October 2024, except CRE (Commercial Real Estate), which is as of December 2023.
Default Rates
According to S&P Global Ratings, default rates spiked in May to the highest level in four years. More than 50% of these defaults came from just four sectors: Consumer Products, Media, Healthcare, and CP&ES (Chemicals, Packaging, and Environmental Services).
Source: S&P Global Ratings, through May 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.
We see slight improvement in median-level coverage ratios through April of this year (the most recent report).
Source: The Federal Reserve “Financial Stability Report.” April 2025.
Bankruptcies
Here we see perhaps a first crack in the credit picture. Bankruptcies have steadily increased over the course of 2024 and through the first quarter of 2025. What we believe will be a generally higher rate environment may lead to a continuation of this trend.
Source: TradingEconomics, US Bankruptcies, data through Q1, 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: The Federal Reserve Board, “Financial Stability Report,” as of April 2025.
We see a different picture if we look at consumer loans versus corporate loans.
Consumers have long since spent down their Covid stimulus money but did not stop their consumption and so began to finance themselves via credit. As rates have risen, so have delinquency rates.
The scaling on the y-axis of this chart 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.
Source: The St. Louis Fed (FRED), 10-year data through Q1, 2025.
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. That regime appears to have “normalized” somewhat.
Overall bank lending has been somewhat stable for most of the past two years. Following a loosening in lending standards through much of 2024, banks have tightened up again slightly in 2025 as they grow concerned over the current economic and interest rates environments.
The volatility in the bank lending environment has been a primary driver of the growth in private credit over the past several years.
Source: The St. Louis Fed (FRED), 5-year data. Loans data through June 2025; Lending Standards data through March 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 June 30, 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 prefer private credit for those clients who can access it and are seeking higher yield. 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 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 are witnessing a decline in pricing, lending standards, and due diligence.
An example of this is the increase in “PIK” (“Payment in Kind”), whereby a borrower repays some portion of its outstanding debt by issuing more debt. Through the first quarter of 2025, we see a steady (though not yet problematic) increase in PIK debt within the private credit space.
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.
Source: PitchBook and the Wilshire “Alternative Investments 2025 Mid-Year Outlook,” July 2025.
We believe the high 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 excellent 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 excellent opportunities for diversifying exposure and generating premium yields.
As always, we welcome your questions and feedback.