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Credit Exchange with Lisa Lee. Explore the latest trends in global credit markets with the biggest movers and shapers on Wall Street and the City, hosted by financial reporting veteran Lisa Lee.
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“Whether it be in the high yield bond market or in the leveraged loan market, even the hint or threat of AI impeding on really any sector – you see pretty significant downside,” says Mitch Garfin, co-head of leveraged finance at the world’s largest asset manager BlackRock, on the latest episode of Credit Exchange with Lisa Lee.Garfin is constructive on the market generally, with growth continuing to “chug along” and inflation currently well-contained. He also identifies significant opportunities from AI, including ongoing data centre build-outs contributing to a significant uptick in supply in the high yield market that is likely to continue.But, he notes, there have also been situations where bonds and loans are down anywhere from a couple of points, and in some cases 5 or even 10 points, on “the immediate sort of threat” from AI. “It’s something to keep an eye on,” he says.Discussing the high yield market specifically, Garfin observes that consumer and retail continue to lag. “We’ve been underweight retail, consumer products, restaurants, leisure – a lot of the sectors that are going to be more impacted by a declining or weaker low-to-middle-class consumer,” he says.He also gives advice to younger industry hopefuls, including staffers and investors.
“It’s going to be a slow build, and we think a sustained multi-year increase in activity,” says David Miller, head of private credit and equity at Morgan Stanley Investment Management, on the latest episode of Credit Exchange with Lisa Lee, speaking about M&A and LBOs.The geopolitical headlines haven’t yet changed the economic picture, says Miller. But over time, they may impact on confidence and fan uncertainty.“As uncertainty rises, risk premium will rise. So that can change the calculus - but we’re not seeing it in the markets yet,” he observes.Miller also discusses running both the private equity and private credit businesses at Morgan Stanley’s asset management arm, a team that numbers more than 150 strong, and what it’s like being part of a global bank.
R.J. Gallo, deputy CIO of fixed income at Federated Hermes, addresses the recent DOJ move to investigate Federal Reserve chairman Jerome Powell and the possible impact on monetary policy, on the latest episode of ‘Credit Exchange with Lisa Lee’.Gallo, who will take up the fixed income CIO role in May, says we might see a more divergent FOMC where the votes actually matter.“Does that make them more hawkish? I don’t know. I’ll tell you this. It certainly won’t make the hawks more dovish,” he says.“It’s important to realise that many presidents get frustrated with the Federal Reserve,” adds Gallo, who prior to joining Federated Hermes in 2000, was at the Federal Reserve Bank of New York. But what has been extraordinary in the Trump administration has been the full-on verbal assault of the Federal Reserve and the resultant “feud between the White House and the Fed.” And the most recent development of the DOJ subpoena has to be viewed in that context.On fixed income, Gallo takes a bit more of a cautious view. While his base case is for the US economy to grow in 2026, he is keeping some powder dry to reassess, in case there’s spread widening. “We don’t just want to chase an already highly-valued market.”Another thing to watch is AI, which has accounted for a large portion of equity returns and stimulated the US economy through high capex spending. If we see poor returns to AI capex, that could challenge equity and credit valuations, Gallo says.
“I come into the year extremely bullish about fixed income and credit in general,” says John Lloyd, global head of multi-sector credit at Janus Henderson, on the latest episode of Credit Exchange with Lisa Lee. The asset manager oversees nearly half a trillion dollars of AUM.Lloyd speaks about how markets are shrugging off some recent big geopolitical events because they do not impact earnings today and are viewed as one-off events, bespoke to a single country. Instead, they are focused on positive GDP growth as well as the Fed, which will be a tailwind to investing, as the US central bank is now injecting liquidity back into markets.Artificial intelligence is also a focus. The hyperscalers will increase their capex budgets because they are in a race over the next several years.Google, Facebook, Oracle and others are all issuing a tremendous amount of debt to support that capex growth. “You are going to see a lot of supply increase this year from AI,” Lloyd says. “I think that’s going to be a little bit of a negative supply technical in the fixed income markets this year, especially in the investment grade space.”
While credit is “probably a four-letter word right now,” it is doing reasonably well, says Tom Majewski, founder and managing partner at Eagle Point Credit Management.“But headlines around the space will continue, and perhaps that unto itself creates some credit challenges,” he adds on the latest episode of Credit Exchange with Lisa Lee.Majewski unpacks the First Brands collapse and fraud in general, noting there’s been a significant decline of occurrences of fraud in the US economy since the Sarbanes-Oxley Act of 2002.He also discusses liability management exercises (LMEs), or coercive restructurings, sharing Eagle Point’s upcoming research that shows there’s been over 100 LMEs in the last five years. “If there’s a little over 1,000 loans, that’s about a 2% LME rate per year, separate from defaults.”
The degree of inflation the past few years has stretched the ‘K’ that defines the K-shaped economy, says Cindy Beaulieu, chief investment officer at Conning Noth America, in the latest ‘Credit Exchange with Lisa Lee’ podcast. Asset valuations and home prices have further added to the pressure.The labour market is central to consumers in both the top and bottom of the K. The upper cohort are participating in the economy in a strong way. The bottom cohort are also participating – but even a modest amount of inflation is painful for them, because the base level of prices now is so much higher than it was just a few years ago.“I would put right in the centre of those two lines of the K, the labour markets,” says Beaulieu, who sets fixed income and equity strategy for Conning North America, which serves the insurance industry and has nearly $200bn in assets under management. “It’s kind of like a rubber band. As long as it doesn’t snap, it holds the K together.”In terms of investing, Beaulieu thinks corporate fundamentals are good. While valuations are stretched, all-in yields are accretive, particularly to fixed-income portfolios. She likes the structured areas and private placements.
The driver for 2026 will be the real step-change in capex requirements all around the AI data boom and the needs of hyperscalers, said Fabianna Del Canto, co-head of EMEA capital markets at MUFG, on the latest episode of the ‘Credit Exchange with Lisa Lee’ podcast.“The absolute quantum required by the data centres dwarfs really any other type of infra-spend that we’re seeing,” said Del Canto.Among myriad other effects, AI has brought about a previously-unimaginable type of demand on, effectively, the entire energy supply ecosystem. Because it’s impacting such a large-scale industry and multiple secondary ones, this is a “real seminal moment and period in time, in terms of how we’re shaping the economies going forward for the future,” she added.But financing the AI boom will look different in Europe and the US.“In Europe, you’re seeing a lot of discussion amongst leaders in the energy space trying to solve this from a sustainable angle,” Del Canto said. “It’s not energy at any cost or any type.”Beyond data centres’ capex needs, Del Canto expects capital markets to be just as busy in 2026, if not busier. As a result, there’s a risk of spreads widening.“We see a very healthy pipeline, and supply is going to keep ticking up in our view,” she said.
Innovation on the liability side is allowing insurance companies to change their funding costs and be more competitive, says Gary Zhu, deputy chief investment officer of insurance at AllianceBernstein (AB), in the latest episode of ‘Credit Exchange with Lisa Lee’.Zhu discusses the proliferation of insurance capital into private assets. He explains that dynamic has to do with lengthening lifespans and a declining lapse rate, the percentage of policies that don’t renew, which has allowed insurance firms more flexibility on liquidity.“They can deploy that capital into private assets, and earn that incremental spread, without giving up anything that they needed,” he says.On the recent stock market volatility, Zhu says that staying invested during good times and bad is important for equity investors in general. On investing, AB’s insurance silo, which has around $200bn in AUM, has been overweight allocations to residential housing credit.“We like the housing market in the US,” he says. “So [the] residential credit market seems to be a place that people have underappreciated the value in the housing markets.”
The end of the US government shutdown has paved the way for a “renewed melt up,” says Matt King, founder of Satori Insights, on the latest episode of Credit Exchange with Lisa Lee. Not just risk assets like equities and credit, but things like gold and Swiss francs, as people worry about how this ends – even as the tide of easy money pushes everything upwards, says King, formerly Citi’s global markets strategist and one of the most widely-followed commentators on financial markets.Since early 2024, the linkage between central bank liquidity and credit spreads and equities has weakened somewhat. It’s not disappeared entirely, but in equities especially, different factors have had an impact. Exuberance and excitement around AI are part of the story, King says, but there’s also ongoing support from fiscal policy and huge fiscal deficits, as well as the massive growth in repo to around a trillion dollars a year, which is becoming increasingly important.“It’s about how much money we’re creating and where that money is then going,” King argues. “I think that’s the main mistake investors have made. If you’ve tried to invest on the basis of your economic view, for over a decade, you’ve struggled, because the drivers here are markets first, and then the economy bringing up the rear.”
The bankruptcies of auto sector firms First Brands and Tricolor Holdings hold “lessons for the future” for credit investors, says Tetragon co-CIO Dagmara Michalczuk on the latest episode of Credit Exchange with Lisa Lee. “The governance issue, although it seems like a soft and fuzzy idea, is incredibly important,” Michalczuk says. “Investing with folks that are not transparent – that has its risks. Lessons can be learned and should have been learned, in both instances.”Overall, Michalczuk’s assessment of the general macro outlook sees slow growth, “slower than what we saw post-pandemic.” With this said, she agrees with the consensus view in the market that 2026 might see a reacceleration of growth, given the downward trajectory of rates, significant fiscal stimulus in the US and Europe, deregulation, and the ongoing capital investment in AI.Credit investors should be prudent and have informed views and opinions on AI, Michalczuk says. At Tetragon, Michalczuk’s team is adapting by looking across their portfolio, “not just [at] software and tech companies, but all of our exposures,” considering both potential positive and negative impacts. “The big concern… is we’re missing something, [that] a business very rapidly becomes undone by a newcomer that disrupts the industry.” That’s why continual reanalysis over time is important, Michalczuk says.
“There are lots of mixed signals out there,” says Chris Wright, president of Crescent Capital Group, on the latest episode of Credit Exchange with Lisa Lee. That’s creating uncertainty. “When we think about the investment environment, we approach it with caution.”On the bankruptcies of First Brands and Tricolor, Wright doesn’t see them as canaries in the coalmine or a tipping point in the economy. But they do show that due diligence matters. There were audit flags, governance failures, and opaque structures that sounded warning bells. “We have to be diligent in our work,” Wright notes.Crescent, a global credit manager with almost $50bn in AUM, recently launched a CLO ETF and has plans to introduce other product, Wright adds. While too early to say whether Crescent will start a European CLO management business, it’s “certainly something that is on our drawing board and we’re spending a lot of time thinking about and assessing,”, Wright says.
Bret Leas, co-head of asset-backed finance at Apollo Global Management, speaks about this booming segment of private credit with Credit Exchange host Lisa Lee, managing editor at Creditflux and editor-at-large at Debtwire. Leas can see the private credit market exceeding the current growth forecast of $40 trillion, and that will have repercussions. “The financing toolkit has gotten so much broader,” he observes.Leas says both public and private investments can be risky and safe. He cautions that there are excesses in the system. Leverage has been ticking up steadily and documentation, especially in the public markets, has been very weak for some time. “There is a level of diligence that you need to do when lending money,” Leas says.For ABF, Europe probably represents a bigger opportunity than the US, Leas contends. The continent has a very narrow banking system and an insurance system that is underinvested. “You have countries that have been so far behind in their build that the ability to catch up through traditional means is very, very unlikely.”Leas also discusses the war for talent, trading of investment-grade private loans, and the knock-on effects of the spending on artificial intelligence.
“The idea that default rates will go up over time is not particularly difficult to get to,” says Jake Pollack, head of global credit financing and North America credit trading at JPMorgan, on the latest Credit Exchange podcast with Lisa Lee. “The markets have been very sanguine, and it won’t be surprising if we see more defaults in the coming months and even years.”Corporate America is doing well, despite some headline-grabbing bankruptcies recently. But Pollack notes that spreads are very tight, which means there’s a lot of capital chasing opportunities. As recent bouts of volatility have demonstrated, it doesn’t take a lot for spreads to widen out.Pollack also tips trading in private credit to increase, especially if the definition of private credit is widened to incorporate private investment grade debt and structured notes. But trading in traditional direct lending loans is less likely to take off.This means that there will be certain areas where that illiquidity premium goes away as the market looks more like its public counterparts. There will be other areas that are not widely held, that can probably keep the spread premium because it’s simply much less tradable, Pollack says.
“Underneath is a lot of volatility. Companies are struggling. You’re seeing really wide dispersion,” says Greg Peters, co-chief investment officer at PGIM Fixed Income, on the latest episode of Credit Exchange with Lisa Lee. Companies, both public and private, are defaulting at a higher rate than you would expect given the macro backdrop.Investors have been too quick to dismiss the possibility of a return in inflation. Peters pegs the probability of the US economy overheating at 25%, and higher than the probability of a recession. The US has fiscal stimulus coming through, likely a more easy Fed, and together with deregulation and some other factors, there’s the real risk of overheating next year, he says. He adds there’s also a 10% probability of a productivity boost from AI.Markets are also struggling with the near-term effects versus the long-term, Peters notes. The case of France is what happens to a sovereign that’s overindebted, where the political system is called into question. “This is very much a canary in a coal mine,” he says.
“It’s a huge differentiator” to have dedicated and experienced personnel to deal with struggling borrowers, says Tim Lyne, CEO of private credit specialist Antares Capital, in the latest Credit Exchange podcast with Lisa Lee. Recent entrants, funds raised in the past five years, often do not.On the M&A front, Lyne doesn’t expect to see a great volume of M&A transactions this year, or indeed in the first quarter of next year. That’s because Antares’ volume on the new business side is average: “if it was going to be great, we would be seeing some of those deals come in the shop already,” he says.Private credit could have financed the $20bn of debt for Electronic Arts, but it would have been a stretch. But that will not necessarily be true for much longer, he observes. “If I fast-forward 3-5 years from now, I think $20[bn] will not be challenging.”There are also too many players, Lyne says, which is compressing fees. With more than $85bn in AUM, Antares has scale, and Lyne says the biggest private credit lenders will continue to get bigger. But for the players in the industry that are not of scale, “it’s going to be incredibly challenging for them to continue to grow over the next five years.”
“Existing investors are probably too long the dollar. They enjoy a very good ride. Valuations are expensive. It makes sense to take profit,” says Grégoire Pesques, CIO, global fixed income at Europe’s largest asset manager Amundi, in the latest Credit Exchange podcast with Lisa Lee.The US, UK, many Eurozone countries, Japan – all have been spending profusely, causing deficits to be a big issue almost everywhere. Describing the fiscal and macro landscape, Pesques details where Amundi, with €2.2 trillion in AUM, is investing. He is buying UK Gilts because the market hasn’t priced in the possibility that growth may slow, and the Bank of England then cuts interest rates.Germany is prepared to turn on the fiscal spending taps, yet will stay one of the safest countries in terms of debt-to-GDP ratios. “There will be a premium for the government that keeps some sort of orthodoxy and has a very strong balance sheet,” says Pesques. There are also pockets of emerging markets that are great investments right now, he adds.There is a big need for diversification away from the dollar and away from Treasuries. But it will take “ages”, he notes, and the rebalancing will be progressive.“It’s always better for a risk-adjusted return to have more diversification in your portfolio,” says Pesques.
“Long-term, I think the game is over from a buyout perspective. I think private capital has won that game,” says Randy Schwimmer, vice-chairman and chief investment strategist at Churchill Asset Management, a leading middle market financing and investment firm with $55 billion in AUM.In the latest episode of the Credit Exchange podcast with Lisa Lee, Schwimmer notes 90% of the leveraged buyouts completed this year were financing by private credit in the traditional middle market space. As for the large-cap deals, the bigger loans that can be multi-billions of dollars in size – while there, too, the majority of LBOs were done by private credit firms, banks have found a way to stay relevant by undertaking refinancings and repricings. Banks also still have significant market share in straight corporate lending and for certain specialist sectors.“It’s a healthy ecosystem right now, where everybody is playing a role,” Schwimmer says.Speaking to banks’ aspirations to create a secondary trading market for private credit loans, that will be difficult, especially in the middle market, Schwimmer predicts. He adds that many have tried. “Illiquidity will still mean something in the traditional middle market,” he says.
“One interesting canary in the coal mine that has not been materially recognised, is the health of the consumer,” says Dan Zwirn, CEO, CIO and co-founder of Arena Investors, on the latest episode of Credit Exchange with Lisa Lee.Zwirn has observed delinquencies in unsecured obligations increase materially, as well as stress in areas like the sub-prime auto market. Original issue consumer lenders are selling off ‘charge-off paper’, which is distressed unsecured debt, at material and elevated amounts.Financial assets are providing the proper signals and indicating trouble in the economy, he says.“What we have seen since the GFC is that the innovation around the thwarting of price discovery has never been more rampant,” he said. “An example of how that touches the consumer is BNPL (buy now, pay later), where certain types of buying don’t necessarily hit consumer credit scores.”But policymakers do have a lot of tools in the toolkit to delay problems, which can stave off a traditional economic crisis. As a result, barring any extraordinary geopolitical events, the market is instead likely to experience a “slow grinding decline,” similar to what Japan experienced with its struggling economy.
“Volatility is now certain. Before, we feared chaos because no-one knew what was coming. Now, it’s priced in” – Alan Schrager, senior partner at Oak Hill Advisors, in the latest episode of Credit Exchange with Lisa Lee.Focus on Treasury markets, advises Schrager. “As a professional investor, what we look at are actually the Treasury markets. They’re sending this signal that there’s this risk inherent,” he says, speaking to the recent rise in long-term sovereign yields of developed countries. “You always think of the risk premium of the US Treasury to be zero. And now that's really what's changed is that there is a risk premium in there.”Schrager also discusses how market volatility, macro risk, and private credit are shaping today’s investment landscape. He sees opportunity in stable companies with stressed balance sheets and notes that private credit spreads have held firm while public markets have tightened.Oak Hill Advisors, which has nearly $100 billion in AUM focused on sub-investment grade corporate debt, is now focusing on trying to provide capital, in either restructuring or refinancing transactions that take decent companies with bad balance sheets and reorganise them.
The likelihood of a September rate cut has edged higher. “They will move ahead with that,” predicts Brad Rogoff, head of global research at Barclays, in the latest Credit Exchange podcast with Lisa Lee.He adds, however, that the market “does need to get used to lower job numbers,” citing what’s currently taking place with immigration and fewer people coming into the workforce. “Just to have a healthy job market, we're not going to have the same job gains as we had.”Rogoff expects inflation to be above the Fed’s target for the back half of this year and into 2026. Chances for a recession in the near term are low, but over a longer time period, perhaps the next two years, the risks are definitely increasing.Fiscal spending will provide some stability as a counterpoint. The yield curve could steepen further and less so than if the US Treasury was issuing in a different way, or if questions around Federal Reserve independence become even more acute.Meanwhile, in Asia, China is going to be a big focus for the rest of the year. “We’ll probably see some stimulative effects implemented in China, but I’m not convinced that there's any bazooka coming,” Rogoff observes. “If we see growth continue to lag in China, that’s probably got to be your biggest focus at this point in Asia.”But a slowing economy is still a positive backdrop for credit and spreads should be tightening, though perhaps not to the degree they have. While Rogoff worries a little bit about the complacency in the market, when he looks down the credit spectrum, markets are proving leery of riskier assets, such as those rated triple C. “It hasn’t necessarily been the rising tide lifting all boats,” he points out.
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