Credit Quarterly: New terms

The repricing of capital is becoming the new normal, creating attractive credit income while increasing stress and dispersion among weaker borrowers.

• The expected post-2023 rate cuts did not materialize: entering 2026, markets priced around 60 basis points of cuts, but by the fourth quarter there had been one hike and no cuts, with inflation still elevated and economic activity strong.
• Treasury yields have risen across the curve, including a 140-basis-point increase in the two-year yield in 2026; fiscal deficits, $40 trillion of U.S. national debt and high debt issuance, including an estimated $5.5 trillion of AI capex needs by 2030, are adding pressure at the long end.
• The repricing is global: 30-year U.K. government bond yields are near 6%, German yields have risen sharply and Japanese government bond yields are at their highest level in 30 years.
• Credit income is attractive despite historically tight spreads: high-yield bonds yield about 8% with spreads near 300 basis points, while broadly syndicated loans yield more than 9% with three-year SOFR above 4.5%.
• Higher interest costs are widening borrower dispersion, with around 10% of senior loans having cash-flow coverage below 1x; companies from 2021–2022 leveraged buyouts may need rescue loans or customized private capital as refinancing costs remain high.

Takeaway: Investors should capture elevated credit yields while limiting duration and avoiding weak credits, and should also consider opportunities in rescue financing and discounted liquid credit created by prolonged interest burdens.