- Investment-grade and high-yield credit spreads have compressed to near pre-2008 lows, leaving little cushion for bad news.
- Private credit has surged to roughly junk-bond scale while relying more on opaque, riskier structures like PIK interest and liability-management deals.
- Bankruptcies and fraud-linked blowups in lightly regulated lenders are early signs that underwriting quality is deteriorating.
- With late-cycle economic strains building, regulators and investors face rising systemic risk from leverage, opacity, and bank linkages in credit.
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The Economist’s recent report warns that credit markets have grown dangerously complacent, with corporate yield spreads over U.S. Treasuries dropping to their lowest levels since 2007. [Primary] Risk compensation has eroded: junk bonds are offering only ~ 2.8 percentage points (280 bps) over Treasuries, well below their 20-year average of ~ 4.5 points. [Primary]
Parallel to this, the private credit sector has grown quickly—reaching parity in size with the junk bond market—and taken on riskier practices. For example, more borrowers are using payments-in-kind (PIK) interest, deferring cash interest and increasing rollover risk. Liability-management and restructuring activity have become more common, possibly masking default risk. [Primary]
These conditions are unfolding alongside early economic soft spots: delinquencies in auto loans have risen, industrial activity has weakened (e.g. truck sales falling), and unemployment has crept upward. Meanwhile, fiscal policy, high tariffs, and inflationary pressures remain unresolved tail risks. [Primary]
External corroboration: Bloomberg data shows that in Q4 2024–2025 IG spreads fell to ~ 72–80 bps (lowest since late 1990s), while HY spreads of ~ 2.9% are near pre-2008 crisis lows. [IG & HY Spread Compression]. Institutions such as the IMF have flagged private credit as potentially systemic—due to its size, opacity, weaker underwriting, and connections to regulated banking. [Private Credit and Regulation Risk]
Strategic implications for investors and policy-makers emerge: portfolios overweight in lower-rated corporate or private credit face limited spread cushion; marking down credit risk or increasing allocations toward higher-grade assets could offer protection. For regulators, there is a growing case to improve transparency into non-bank lending, monitor PIK and covenant lite activity, and stress test private credit exposures linked to the banking system. For firms, discipline in leverage, liquidity, and forward guidance becomes ever more central in a late-cycle context.
Open questions include: how quickly weak actors (especially in private credit) will be exposed under a more stress or tightening Federal Reserve environment; whether rising refinancing demands (especially in HY and BBB credits) will trigger spread widening; and how external shocks, such as escalation in trade conflict, inflation surprises, or geopolitical risks, might ignite broader re-pricing.
Supporting Notes
- Junk-bond spreads are about 2.8 percentage points over Treasuries versus ~4.5 points average for past 20 years; IG bond yields for top-rated corporates (e.g. Microsoft) fall below U.S. government yields. [Primary]
- Private-credit market size was roughly $1.6 trillion at end-2024; now similar in scale to the U.S. junk-bond market. [Primary]
- Percentage of private-markets firms using payments-in-kind interest up to ≈ 11%, from ~7% in 2021. [Primary]
- Auto debt delinquency (90+ days) rose to ~5% in Q2 2025, highest in five years. [Primary]
- U.S. IG corporate bond spreads narrowed to ~ 72-80 bps in 2025, lowest since late 1990s. [IG Spread Compression] [IG & HY Spread Compression]
- U.S. HY bond spreads (OAS) ≈ 2.9% (or ~290–320 bps) as of mid-2025, close to pre-crisis lows; despite rising default or downgrade activity in speculative segments. [HY Spread Compression] [Private Credit Weakness]
- IMF and other regulators warn that private credit’s rapid growth, opaque practices, and linkages to banking regulators pose systemic risk; institutions like First Brands and Tricolor illustrated weak underwriting and fraud-related collapses. [Private Credit Data] [Private Credit Risks]