Art by Valeria Petrone
Credit had an interesting year in 2025. Many asset managers and investors went into the year thinking they were about to ride a wave of new issuance and merger-driven deal flow, supported by deregulation and a pro-business administration. What markets got instead was a year defined by tariffs, uncertainty and elevated volatility.
Investors have done well to avoid duration in this environment. Risk factors in private credit increased, leading some investors to refocus on liquidity. As we move into 2026, sources say, investors will need to take a more active approach to portfolio management to navigate a riskier new normal.
“Credit spreads are tighter than they’ve been in decades,” says Eric Gerster, CIO of AlphaCore Wealth Advisory. “It’s a reflection of yields being higher. So you have a lot of investors that have gone into different credit instruments because the yields were higher. But going into 2026, aggregate bond yields are in the low fours, as opposed to the high fours. So you’re starting the year at lower income. At the short end, that makes things tricky. If you want the same yield, you’ve got to go riskier or add duration.”
Those choices can be tough for investors, Gerster says, in part because they still are not being paid to take duration risk. Riskier parts of credit—such as high yield or private credit—are also likely to come with their own challenges, as overall credit markets are starting to show more signs of stress.
“This is a time where we’re looking for true multi-asset credit managers who can understand risk,” Gerster says. “We don’t want someone who is going to be locked in to only high yield or only private credit, because flexibility is going to be key over the next year.”
Risks and Trade-Offs
For institutions, 2026 is likely to be a year of trade-offs. Long-term liabilities require ongoing purchases of long-dated bonds, for example. But, Gerster says, investors might also need to rethink how they approach risk management for the medium- and short-term parts of their portfolios.
“Look at the 10-year right now. I’m going to make 4.15%—I know that,” he says. “I don’t think the U.S. is going to default over the next 10 years. But if I’m looking for higher returns, I might sell it. If rates go up [1 percentage point] on the long end, which wouldn’t be crazy at all—we were there in the last 18 months—I’m down 10%, all else equal on price, and I made 4.15% on my yield, so I’m going to lose 6%. Investors have to think through those trades.”
On the private credit side, investors are also running into trade-offs. Performance for direct lending funds in 2025 held up despite higher default rates and a few high-profile write-downs. But beyond top-line performance figures, investors are pivoting into asset-backed finance and looking at a broader range of private credit investments. Sources say investors are looking to diversify, which suggests they are looking for more defensive opportunities and liquidity in case a small number of defaults turns into a bigger issue.
In a recent interview, DoubleLine Capital Founder Jeffrey Gundlach, said private credit was awash in “garbage lending” based on unrealistic valuations. Jay Clayton, U.S. attorney for the Southern District of New York , who led the Securities and Exchange Commission during President Donald Trump’s first administration from 2017 through 2020 and was a chair of Apollo Global Management, has also raised concerns about how performing loans are priced—especially when they are moved into continuation vehicles. The number of general partner-led private credit secondary-market funds has increased significantly in recent months.
Sources say risk factors are elevated, but there is not widespread underperformance yet.
“The political, regulatory and tariff environment is making confident underwriting more difficult,” says Michael Gebhardt, a principal in VSS Capital Partners. “The pace of change, coupled with a lack of clarity on what the impacts will be, means that you have to be very disciplined. That said, we did see new deal volumes pick up in the back half of this year, and there is a pipeline going into 2026. And, this has been confirmed by the investment bankers and intermediaries we speak with.”
Gebhardt adds that default rates have also picked up in the broadly syndicated loan market, which suggests the uptick is not limited to private credit. He notes that deals happening at the upper end of the middle market and among mega-funds are likely more sensitive to macroeconomic conditions, whereas lower-middle-market deals have exhibited less sensitivity and are driven more by idiosyncratic risk. In this environment, he says, investors need to be really clear about what they own and what they are comfortable with.
Markets are already starting to price in 50 basis points of cuts from the Federal Reserve in 2026, and if the Fed makes good on that, private credit might get a bit of a reprieve. Private credit returns increase when interest rates rise because they are typically floating-rate loans. However, if rates go down, the cost of capital for the companies holding those loans will go down.
“If that happens in this business environment, then it’s going to be easier for companies to make their payments,” Gerster says. “That’s ultimately supportive for private credit managers, even if they lose a little on rates.”
A lower cost of capital is also supportive for businesses at the smaller end of the market.
“We’re working with businesses on a structured capital basis, so it’s not just pure direct lending—we also have some equity upside. We’re seeing a lot of founder-owned businesses that are looking to expand through [mergers and acquisitions], and we’re helping them do that,” Gebhardt says. “But we are also spending a lot of time with investors explaining how we return capital and highlighting the differences between where we sit compared to the largest direct-lending funds.”
If there is a significant economic slowdown, however, that could put more pressure on companies—especially if rates stay where they are or go up. Federal Reserve Chair Jerome Powell has recently been focused on maintaining “neutrality” in his public remarks, which indicates the Fed might be looking for ways to keep its options open, to ensure it has more levers to pull if a crisis emerges. But a new Fed chair also is on the horizon, and it is less likely a new central head will be focused on neutrality.
The use of bespoke credit-default swaps by a growing number of companies is also raising concerns. Mega-cap tech companies, including Coreweave, Meta and Oracle, have all gone to the CDS market in recent weeks to insure their aggressive artificial intelligence-related spending.
“I’ve never had a reason to keep an eye on Oracle’s CDS, but now I am,” says Jack McIntyre, a portfolio manager at Brandywine Global. “I think we’re all trying to extrapolate potential risk factors, but there’s a lag effect. I don’t think there’s a big concern at the moment, but if the economy really starts to wobble and there’s a surprise, that surprise probably happens in private credit.”
Taking a Global View
Trends that started in equities are also starting to spill over into credit. Ultra-high valuations in large-cap equities have pushed more investors to look at global companies, in part because of the discount and in part because investors are looking for ways to position themselves more defensively. That’s also true in credit.
“There are a lot of positives in developed-markets credit right now,” McIntyre says. “The return premia [are] there. That said, if there’s a problem, we’re probably going to see that problem happen in developed markets. So I think more investors are weighing their options at the moment. They’re looking for diversification.”
McIntyre invests in a broad range of emerging-market bonds, but he says he’s got a bit of a Latin America bias right now: “If we start to see dollar weakness for an extended period of time, that’s going to drive more capital into emerging markets.”
Robert Koenigsberger, founder and CIO of Gramercy Funds Management, says he is also tracking the growth of emerging markets private credit: “Private credit in emerging markets is basically where private credit was a decade ago, characterized by high returns, in dollars, loans that are senior secured and backed by collateral, and low loan to value.”
Investors, now familiar with the asset class, want to put capital to work, and there is not the same level of competition for deals globally that there is in the U.S. But there are also risks. Koenigsberger says finding deal teams that have global experience is harder, on top of all the usual risks associated with emerging markets. They may also provide a longer-term growth story because of the relative newness of the asset class.
“From a private credit perspective there’s a lot of growth potential in emerging markets right now, especially for the long-term investor,” Koenigsberger says. “I think it comes down to how you think about risk. Are you going to keep getting paid for the level of risk you’re taking from the big-name brands? Maybe. But we’re seeing more investors saying it’s time to diversify the book.”
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Tags: credit management risk, credit markets, fixed income strategies, Interest Rates, Private Credit