Credit Quarterly: New terms

Summary

• Four years after the 2022 interest rate hikes began, the trend has not reversed, with U.S. 10-year Treasury yields recently crossing the 5% threshold.
• Expected rate cuts have not materialized; the U.S. economy remained resilient with stubborn inflation, preventing the recession that would have triggered rate reductions.
• Market expectations for the federal funds rate shifted from anticipated cuts to hikes, resulting in one rate increase and zero cuts in 2026.
• The two-year Treasury yield rose 140 basis points in 2026 due to persistent inflation and a strong economy.
• Long-dated bond yields increased due to robust growth expectations, fiscal uncertainty from a $40 trillion U.S. national debt, and high supply of debt to fund AI infrastructure.
• Elevated bond yields represent a global phenomenon, with 30-year U.K. government bonds reaching nearly 6%, German yields spiking, and Japanese yields hitting 30-year highs.
• High yield bonds currently offer an 8% yield with spreads around 300 basis points, compared to below 4% five years prior.
• Floating-rate assets benefit from a three-year SOFR above 4.5%, supporting yields over 9% on broadly syndicated loans.
• Approximately 10% of senior loans now have cash flow coverage below 1x, with particular pressure on debt from 2021–2022 leveraged buyouts.
• Weaker borrowers face eroding cash flows due to high interest expenses, creating a need for rescue financing or customized private capital solutions.
• Investors are advised to seek high absolute income via credit, manage risk to avoid losing credits, and avoid excessive duration while targeting opportunities in distressed or rescue financing.