Key takeaways
- Public credit spreads are priced for full optimism despite credit fundamentals declining. Private spreads offer compelling value.
- Higher for longer may continue to support attractive public credit yields, but credit losses may continue to rise.
- Better relative value, structure and terms to continue support private credit performance. Public credit may present value on a tactical basis.
The past two years have been stellar for credit investors. The Fed’s rate hike cycle was presumed finished in mid-summer 2023, and credit settled into the start of the higher for longer interest rate regime. The much-feared Fed-induced recession never occurred, and the U.S. economy’s dogged resilience became the envy of the developed world.
Against this backdrop, credit defaults have remained largely contained, inviting investors into yields that have produced an attractive level of income-driven total return. In high yield, we’ve noted a variety of other compelling attributes supporting a favorable view of the asset class over the past 12 months.
However, as we sit here today, we believe the optimism in public credit has gone too far. While private credit is not immune from certain of the risks present in public credit, substantially higher spreads provide a more appropriate risk premium for the financial risk taken. Private credit also addresses shortfalls of the syndicated market through its structure and terms, which better protect lenders in the event of credit stress. As such, we view private credit as the core of a diversified credit allocation today with public credit supporting the allocation on a tactical basis when volatility spikes and select value opportunities arise.