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Chart of the week

Private credit yields remain attractive despite Fed rate cuts

Real yields on private credit could remain in their top historical quartile even if the Fed cuts another 75 basis points as markets expect.

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November 8, 2024 | 2 minute read

Private credit real yields, forecasted real yields

Line chart showing private credit real (inflation adjusted) yield and forecasted real yield based on the market-implied forecast of the Fed funds rate through December 2025. Even if the Fed reduces rates by another 75bps by December 2025 as the market currently expects, a private credit real yield of approximately 7.7% would be higher than in 80% of cases throughout the market’s history.

Source: Cliffwater, Bloomberg Finance, L.P., as of September 30, 2024. Market-implied forecast based on Fed funds futures prices and Bloomberg consensus CPI estimates as of November 7, 2024.

  • Yields across credit markets have declined this year as the economy remains resilient and the Fed cuts rates. Yields on private credit have been no exception.
  • But even with the 75bps in cuts Fed policymakers enacted during their last two meetings, private credit retains attractive nominal and real (inflation-adjusted) yields of approximately 11% and 8.4%, respectively.1
  • If the Fed reduces rates by another 75bps by December 2025 (as the market expects), a private credit nominal yield of around 10% would likely imply a real yield of approximately 7.7%—higher than in 80% of cases throughout the market’s history.1
  • Furthermore, lower rates in the absence of a recession would likely spur a rebound in merger and acquisition activity, which we have already begun to see.
  • Altogether, real yields on private credit should remain attractive relative to history even if the Fed continues to methodically reduce its policy rate, particularly if inflation continues to normalize.

  • Cliffwater, Bloomberg Finance, L.P. as of September 30, 2024. Market-implied forecast based on Fed funds futures prices and Bloomberg consensus CPI estimates as of November 7, 2024.

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