July 10, 2026

Private Credit Markets – Q2 2026 Update

RISK MARKETS RECOVERED, BUT BIFURCATION INCREASED

After a volatile start to the year, risk markets found their footing during the second quarter. The S&P 500 gained roughly 14% during the quarter, while the Nasdaq advanced more than 20%, marking one of the strongest quarterly performances since 2020. Credit markets followed suit, with high-yield spreads tightening into the mid-200 basis-point range, leveraged loan issuance remaining active, and capital broadly available despite ongoing concerns around inflation, geopolitics, and monetary policy. [1]

At first glance, it looked like a broad-based recovery. Beneath the surface, however, a different story continued to unfold. The defining feature of the quarter was growing bifurcation. Strong borrowers generally continued to access capital on attractive terms, while weaker borrowers faced greater scrutiny.

THE FED MAY HAVE CHANGED ITS MIND. WE HAVEN’T.

Earlier in the year, investors focused on future rate cuts. By quarter-end, the conversation had shifted toward higher-for-longer rates and even the possibility of additional tightening. We continue to disagree with that view. As we noted last quarter, our base case remains that the Federal Reserve has already done enough. Rates remain elevated enough to pressure interest coverage, refinancing decisions, and free cash flow across portions of the market.

AI WASN’T JUST AN EQUITY STORY

Artificial intelligence remained the dominant investment theme of the quarter but increasingly became a credit story as well. AI-related infrastructure continues to drive debt issuance, infrastructure financing, and private capital deployment. [2]

GEOPOLITICS AND OIL: A REMINDER, NOT A THESIS

Oil prices experienced significant volatility before retracing much of the move. From a credit perspective, the lesson is not about forecasting oil prices but about lending to businesses with pricing power, liquidity, and balance-sheet flexibility. [3]

PUBLIC CREDIT: OPEN MARKETS, INCREASING SELECTIVITY

Public credit markets had a strong quarter. Investment-grade spreads tightened to roughly 70 basis points, high-yield spreads approached 250 basis points, and leveraged loan spreads remained closer to 500 basis points. [4]

High Yield remained technically supported but valuation-constrained. Investors are increasingly earning returns through carry rather than spread compression. [5]

Leveraged loans remain where bifurcation is most evident. B3-rated loans now represent roughly $300 billion of outstanding leveraged loans compared with approximately $109 billion at the end of 2019. [6]

Demand for Collateralized Loan Obligations (CLOs) remains supportive, though increasingly selective. Software continues to be one of the clearest examples of growing dispersion across credit markets. [7]

PRIVATE CREDIT: DISPERSION IS INCREASING

We believe that private credit remains one of the most attractive areas of the market, but the conversation continues to evolve. Investors are spending more time discussing underwriting quality, valuation practices, portfolio construction, liquidity provisions, non-accrual trends, and manager discipline.

At the same time, fundraising remains heavily concentrated among a relatively small number of very large managers. The industry’s biggest platforms continue to attract the majority of new capital, and much of that capital ultimately competes for many of the same borrowers, sponsors, and transactions. [8]

This dynamic creates an interesting contradiction. Investors appear increasingly willing to recognize dispersion among credits, industries, and managers—yet fundraising patterns continue to suggest that many allocations are still being made as though private credit were a uniform asset class.

We think the market is moving in the opposite direction. Differences in underwriting standards, leverage levels, portfolio construction, documentation, and valuation assumptions are becoming increasingly important. The irony is that as markets become more differentiated, we are seeing many investors continue to allocate capital in a less differentiated manner.

We continue to see significant amounts of capital concentrated in some of the most competitive corners of private credit. The usual suspects continue to pursue many of the same borrowers, sponsors, and large-cap transactions. Some of the better risk-adjusted opportunities may increasingly exist outside the most crowded segments of the market, particularly where lenders can negotiate tighter structures, stronger documentation, more meaningful covenant protections, and better economics.

Public and private markets continue to converge. Strong borrowers increasingly move between the two markets depending on pricing and execution certainty. [9]

WHY WE CONTINUE TO LIKE THE LOWER-MIDDLE MARKET

We believe the lower-middle market represents one of the areas where increasing bifurcation creates attractive opportunities for disciplined lenders. As more capital becomes concentrated in larger transactions, lenders in the lower-middle market often retain the ability to negotiate stronger covenant packages, tighter documentation, and more meaningful lender protections.

LOOKING AHEAD

What stood out most during the second quarter was how selective markets became. Strong borrowers continued to find financing. Strong businesses continued to attract investors. Strong managers continued to separate themselves from the pack. We believe selectivity, underwriting discipline, and manager differentiation will matter even more in the quarters ahead.

Footnotes:

[1] Market performance data and credit market conditions as of June 30, 2026.  Bloomberg

[2] AI infrastructure financing, issuance trends, and capital expenditure research. JPM

[3] Commodity and energy market developments during Q2 2026.  DB

[4] Investment-grade, high-yield, and leveraged-loan spread levels as of quarter-end.  MS

[5] High-yield spread levels relative to historical averages. JPM

[6] Leveraged-loan market composition and B3-rated loan statistics.  BOA

[7] CLO issuance and leveraged finance market conditions during Q2 2026.  CreditSights

[8] Private credit fundraising, direct lending activity, valuation scrutiny, and market trends. Pitchbook

[9] Public versus private credit market activity and financing trends.  Pitchbook