Read More
The LPL Financial commentary “Cockroaches, Canaries, and Credit Markets” outlines early warning signals in the credit markets, especially within leveraged credit segments—high-yield bonds, bank loans, and private credit—while underscoring that the investment-grade sector remains relatively stable [1]. It uses Jamie Dimon’s “cockroaches” metaphor to emphasize that visible credit events tend to presage more widespread deterioration when underlying conditions are unfavorable [1].
Lower-rated borrowers are under pressure: recent collapses—such as Saks, New Fortress Energy, Tricolor Holdings, First Brands Group—have delivered deep losses (≈ 60%-plus) and point to increasing default risk among speculative credits [1]. Concurrently, private credit observations show rising usage of PIK interest (over 11%)—the highest in four years—and interest-coverage ratios falling to about 1.8x in Q2 2025 down from ~3.5x in Q3 2021 [1]. These are classic signs of borrowers being stretched.
In terms of risk‐reward, investment-grade bonds continue to benefit from strong demand, elevated nominal yields, and stable technical conditions crowding out downside risk in public credit markets [1]. But with high-yield spreads near historic tights, per-unit risk is rising. Supporting this, recent data show credit spreads in high-yield markets tightened to about 280-bps OAS as of late October 2025, one of the tightest readings outside of bubbles [2].
Private credit has rapidly expanded—both in size and investor base—offering yields above public markets, less liquidity, and looser covenants. While defaults remain modest (≈ 1.76% in Q2 2025, down from 2.67% end-2024) [1], opacity makes true exposure and potential losses difficult to assess [1][3]. Bank of America forecasts defaults in private credit may ease somewhat in 2026 to ≈ 4.5% from ≈ 5% in 2025, but fragility persists [3].
Strategically, investors and institutions should monitor refinancing risks in 2026-2027 facing leveraged borrowers who issued under low-rate regimes. They should expect dispersion: strong performance in investment-grade and among structurally advantaged issuers vs. elevated losses among lower credit tiers. Rigorous credit due diligence, stress testing, and exposure limits to weaker balance sheets become more essential. Avoiding overconfidence when spreads are tight is a prudential posture as systemic risk is rising but not yet systemic collapse [1][3].
