“Oh, there ain’t no rest for the wicked
(and) Money don’t grow on trees
I got bills to pay, I got mouths to feed
There ain’t nothing in this world for free…”
(From “Ain’t No Rest for the Wicked,” by Cage the Elephant, 2008)
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
The US credit markets are exhibiting an interesting dichotomy. Despite rising inflation and multiple sources of geopolitical tension, the public bond market has been quiet for much of the past year, though we have seen an increase in rates since the beginning of the Iran war.
The private credit market is a completely different story. When news came out about the release of new Artificial Intelligence (AI) “agents” that could potentially replace or significantly disrupt the software industry, private credit became front page news – and not in a positive way.
But public credit spreads remain remarkably tight – we might say complacent – seemingly ignoring significant economic and geopolitical events.
Most investors remain fixated on the equity markets, especially in light of the incredible euphoria about AI and semiconductors (though we may be beginning to see signs of fatigue among investors in these sectors).
But we believe it still matters to understand 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 also believe it is important to separate fact from fiction, and to look beyond the headlines to try and get a firmer grasp on what actually might be going on. We believe this can help us make better overall investment decisions.
In this two-part blog series, we will examine the current outlook for the US rates & credit markets, beginning with the public markets.
Let’s dive in.
Let’s Start with Rates
Following an extended period of stability, interest rates began to rise slowly late in November of 2025, and this rise accelerated with the outbreak of the war with Iran. We have been in the market long enough to remember when 5% was considered “normal” for the US 10-year Treasury rate, so the current level of roughly 4.5% does not overly concern us at the absolute rate level.
What is more interesting is the change in shape of the yield curve – it has both moved up overall and it has flattened.
The reason the long end of the curve is rising is increased concern regarding inflation, and this was occurring even before the Iran war began. The Fed has been unable to get inflation down to its 2% annualized target, and in fact it is moving in the wrong direction.
Source: St. Louis Fed (FRED), 3-year data through May 2026.
The short end of the curve has also moved up, and the primary driver there is a changed perspective about future rate policy from the Fed.
In his first post-FOMC press conference after becoming Chair, Kevin Warsh made it clear that he viewed the Fed’s primary focus as price stability (i.e., inflation).
The market quickly reacted by pushing up the 2-year Treasury rate (first chart) and pricing in Fed rate hikes over the remainder of this year (second and third charts).
Source for the previous three charts: The Daily Shot, as of June 18, 2026. Past performance is no guarantee of future results.
So, here is the yield curve as we write this – we can see the gradual rise at both ends of the curve as well as the overall flattening over the past twelve months.
Source: Ycharts, 12-month data through June 19, 2026. You cannot invest in an index, and past performance is no guarantee of future results.
We note that rising rates is not solely a US phenomenon – most major sovereign borrowers are seeing an increase as well.
Source: Goldman Sachs “Market Pulse,” as of June 2026. You cannot invest in an index, and past performance is no guarantee of future results.
Although the US yield curve itself has moved in reaction to market, economic, and geopolitical events, the volatility of the bond market remains remarkably low (outside of a brief spike when the war with Iran began).
Source: TradingView, YTD data through June 18, 2026. The MOVE index is a measure of short-term volatility in the US Treasury bond market as implied by the current prices of 1-month Over the Counter (OTC) options. You cannot invest in an index, and past performance is no guarantee of future results.
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 remain at the tightest levels they have been in ten years.
Source: Ycharts, 10-year data through June 19, 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 the economy is solid and the balance sheets of most companies are in decent shape.
Companies with a heavy reliance on floating rate debt (such as most borrowers in the private credit market) may face pressure if short-term rates continue to rise, and we will discuss that in greater detail in Part II of this series, when we focus on the private markets.
Given where rates and spreads are currently trading, however, and what we believe will be continued 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 aligned with a broad market consensus view.
Sources: Convex Intelligence, as of June 2026. These are forecasts and subject to change as additional data come in. You cannot invest in an index, and past performance is no guarantee of future results.
Further, with less than a 30-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.
Investors are being paid to take credit risk but, again, we view the pressure on spreads as upward as we move through the year.
Source: Multiple sources, including Nuveen, StreetStats, Charles Schwab, and Bloomberg, as of June 18, 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), as we reach the midpoint of 2026 the global public debt markets remain in stable shape.
Source: S&P Global “This Week in Credit: Positive Momentum,” as of June 22, 2026.
Fitch, another of the primary ratings agencies, has a slightly more negative outlook versus S&P Global for corporate borrowers, with negative outlooks outweighing positive.
Source: Fitch Ratings Performance, as of May 31, 2026.
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 a relative peak in 2028.
Source: S&P Global, estimated totals as of January 2025.
High yield debt, however, will see a peak in 2029 and will be refinancing into an unknown rate and credit environment.
Sources: Reuters, Pitchbook, Bank of New York, through May 2026. This 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 remain at their lowest level since 2022, but note that the US percentage of these defaults is trending upward (first chart).
We note as well that the number of US high yield bond defaults has also ticked up but remain within historical levels at roughly 4% (second chart).
Source for both charts: S&P Global Ratings, as of June 18, 2026.
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-five years.
The interest coverage ratio (ICR) for investment grade borrowers remains healthy. The ICR for “speculative” (high yield) borrowers is trending upward but remains in the bottom quartile of its historical distribution.
Source for the previous three charts: The Federal Reserve “Financial Stability Report,” May 2026.
Bankruptcies
Despite a generally benign credit environment, we saw an increase in US bankruptcies to almost 26,000 in Q1 2026. 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 Q1, 2026
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 May 2026 “Financial Stability Report” from the Federal Reserve Bank, we see a trend downward in total bank borrowers and the overall number remains low by historical standards (first chart), although we do see an increase in the number of borrowers with Debt-to-EBITDA ratios greater than 4x (second chart).
That said, the default rates by these borrowers remain manageable (third chart).
Source for the previous three charts: The Federal Reserve Board, “Financial Stability Report,” as of May 2026.
We see a slightly different picture if we look at consumer loans versus corporate loans.
The first thing we note is that, essentially since Q2 of 2024, personal disposable income has not kept up with inflation (as measured by the Personal Consumption Expenditure Index).
Source: St. Louis Fed (FRED), 3-year data through April 2026.
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), 3-year data through May 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 slight downward trend over the past several months.
Source: The St. Louis Fed (FRED), data through Q1 2026.
The scaling on the left y-axis of this chart (showing delinquency rates) perhaps over-amplifies the issue.
Delinquency rates have risen but do not appear problematic. As a point of comparison, following the Great Financial Crisis (GFC) of 2008, delinquency rates on credit card loans rose to almost 7% versus the current level of roughly 3%.
That said, current delinquency rates are higher than their 10-year historical average.
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 their lending standards.
This, combined with the regulatory constraints placed on banks by the Dodd-Frank bill following the GFC, were significant catalysts to the explosion in private credit we witnessed over the previous 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 May 2026
Summary and Interpretation
We remain comfortable with the current public 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, so we continue to believe there is muted total return potential in the public fixed income market.
We can see this playing out so far in 2026, using as proxies four widely traded ETFs.
Source: Ycharts, YTD data through June 22, 2026. The ETFs shown are for illustration purposes only and do not represent investment advice. Past performance is no guarantee of future results.
There are issues worth paying attention to in the public markets. Specifically, we are concerned about the increasing use of expensive credit card debt to finance personal consumption. While it does not appear to be problematic yet, this is an unsustainable trend, especially if the economy or labor market cool off, or if inflation continues to rise.
From an investment perspective, we do not view the yields being offered by high yield bonds as appropriately compensating investors for the underlying credit risk.
We continue to recommend a barbell approach, whereby investors balance investment grade bonds of medium duration with shorter-term bonds, in order to generate the desired level of yield without taking excessive credit or interest rate risk.
Despite the media attention surrounding private credit (which we address in Part II of this blog series), we continue to believe there remain interesting opportunities to pick up enhanced yield on a floating rate basis without taking on excessive credit risk.
Our model portfolios, therefore, begin with a combination of investment grade bonds and floating-rate private credit, which we then adjust to meet specific investor objectives and risk tolerances.
As always, we welcome your questions and feedback.