(Bloomberg) — War in Iran. A weak US labor market. Artificial Intelligence and the Potential Death of an Entire Industry. Increasing pressure on private credit.
Risks are rising in US and European credit, and some investors and strategists think it’s time to buy protection against market tanking while such hedges are still relatively cheap.
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Barclays strategists suggested buying credit default swap protection on the U.S. high-yield index this week. To help pay for the trade, the bank offers to sell some security that is less likely to pay, a combination of trades known as payer swaps. Morgan Stanley recently offered a similar business.
Hedging proposals seem to be gaining traction. The cost of buying protection in high-grade U.S. corporate bonds edged up nearly 0.03 percentage points, or 3 basis points, this week, even as spreads over cash bonds narrowed by 1 basis point. This indicates that market players are turning to derivatives to hedge against credit risk, while in corporate bonds, they are not selling the bonds to a degree that would raise concerns about corporate defaults.
“Between the risks the market worries about in private equity and geopolitics, and the risks reflected in high-grade corporate bond spreads, material needs to be washed away,” said Andrew Weinberg, portfolio manager at Sabah Capital Management. “This is a very good time to look for credit hedges.”
The US-Israel conflict in Iran shows signs of abating, and investors in the oil market are pricing in the lingering conflict. Rising oil prices could translate to higher inflation, which has helped raise yields in bond markets globally.
Any sign of higher inflation could prompt the Federal Reserve to slow its pace of easing. If the U.S. central bank finally starts raising rates, credit will suffer, JPMorgan Chase & Co. strategists wrote in a note Thursday.
Meanwhile, employers in the United States unexpectedly cut 92,000 jobs in February. The pain was seen across a wide range of industries, not just one or two, raising questions about how strong consumer spending growth will be in the coming months. Over time artificial intelligence can also lead to layoffs, potentially eliminating jobs across businesses. Fearful investors withdraw money from some private credit investments.
Acceleration bets on credit default swap indices have eased over the past few weeks amid concerns about the software sector, according to DTCC data analyzed by Barclays Plc. Weekly data does not yet reflect the impact of the war in Iran, although a jump in the CDS index spreads amid higher trading volumes suggests a position shift is underway.
Some money managers have been reducing their risk for months as valuations rise and potential problems such as geopolitical tensions and a potential economic slowdown grow. For example, DoubleLine Capital said in June it had the lowest allocation to speculative-grade bonds.
“We don’t want to be in a position where we have to react when the market goes down,” said Ryan Kimmel, a fixed income strategist at DoubleLine on Friday, adding that the company would rather take deals if they come up.
For now, investors are far from panicking. The cost of credit default swaps has risen in recent weeks, but is still below levels even in April 2025, when markets were worried about Trump’s Independence Day tariffs. Risk premiums on cash bonds have only risen in the past month.
Lack of fear may present a good opportunity to reduce some risk.
“Investors can still position for risks that appear to be on the downside,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. “Recent geopolitical events, with AI, software and private credit, are increasingly intertwined. This is likely to create clear winners and losers.”
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The global rush to raise debt stalled earlier in the week as conflict in the Middle East rattled markets and raised gauges of credit risk. Corporate bonds fell relative to government debt, after weakening earlier, as money managers grew more unhappy that US and Israeli airstrikes on Iran would have relatively little impact on the global economy. Meanwhile, credit investors are opening tens of billions of dollars worth of long positions and going into the hedging business.
The war itself does not directly affect corporate bond spreads or returns, and values are driven by what the Fed does amid the conflict, according to JPMorgan Credit Strategists.
BlackRock Inc. After rising customer demand for bailouts it halted withdrawals from its largest private credit fund, the latest sign of retail concern about the $1.8 trillion private credit industry.
With record fundraising after the 2008 financial crisis, direct lenders have lowered their underwriting standards and are in for a cycle of defaults, according to a Pacific Investment Management Inc. analysis of personal credit risks.
Blackstone Inc. is allowing investors to withdraw a record 7.9% of shares from its private credit fund. The company turned to old-fashioned door-knocking — internally — to help raise money to bail out investors, with more than 25 senior executives raising about $150 million for Blackstone’s private credit fund. Blackstone president Jon Gray called the concerns in the market “a tone of noise.” Goldman Sachs Group Inc. One of the private credit executives said that withdrawal limits are generally “features, not bugs.”
David Solomon, chief executive of Goldman Sachs, said he does not see cause for concern in personal credit, but that the company is watching closely to see if there is too much depression.
UBS Group AG’s prediction last week that personal credit default rates could reach 15% “was completely wrong,” said Mike Arugetti, CEO of Iris Management Corp.
Business development firms are focused on making private loans, but are also sitting on large chunks of leveraged loans that can be sold to meet redemption demand and encourage wider issuance, according to Deutsche Bank AG.
BlackRock has reduced the value of personal debt to zero by the end of 2025, just three months after it was valued at 100 cents on the dollar.
Blue Owl Capital Inc. It has a £36 million ($48 million) exposure to Century Capital Partners Ltd, a London-based property lender that filed for administration last month.
JPMorgan is shifting most of its debt financing toward junk bonds to buy the electronics giant’s record profits.
Selling risky debt gets tougher: Arclin Inc.’s $1.1 billion loan DuPont de Nemours Inc. to finance the acquisition. Aramids help finance businesses selling for just 92 cents on the dollar – the biggest discount to finance an acquisition in months.
SoftBank Group Corp. is seeking a $40 billion loan, mostly to help finance its investment in OpenAI, in what would be its largest-ever borrowing to be denominated in dollars only.
Elliott Investment Management, SMBC and Macquarie Group Ltd. All are facing Market Financial Solutions Ltd., adding to the list of Wall Street firms caught up in the collapse. Barclays Plc is owed about £500 million ($669 million) by companies linked to MFS, one of the UK mortgage lender’s biggest exposures.
About $17.5 billion in debt tied to Elon Musk’s social network X and artificial intelligence startup xAI is being repaid in full. Morgan Stanley, which is handling the debt raising for both companies, has told existing creditors that X and xAI will repay the remaining debt.
In what could be Japan’s biggest takeover deal yet, Toyota Industries Corp. – the century-old maker of textile looms that has grown into the world’s largest automaker – is poised to become part of a new powerhouse after an unprecedented battle with Elliott Investment Management.
Stephen Graham, the former CFO of First Brands Group, has pleaded guilty to a massive fraud that forced the auto parts supplier into bankruptcy, and he will testify in their criminal trial against the company’s founder Patrick James and his brother Edward.
Brazilian sugar and ethanol producer Raisin SA said it could go into an out-of-court restructuring process as it seeks a solution to debt problems.
in motion
Citigroup Inc. Global Head of Debt Capital Markets, Richard Zogeb, is retiring after four decades at the firm. The bank is promoting North America DCM chief John McAuley to lead its global lending unit alongside Chris Munro, who joins from Bank of America Corp.
Morgan Stanley has promoted Wall Street veteran Will Licht to global head of secured products group distribution.
Mesirow Financial Inc. Grows its credit sales business by hiring David Inman as managing director on its capital markets desk, bringing him from Deutsche Bank. Before his career in finance, Inman played hockey at Notre Dame and was drafted by the New York Rangers in the 90s.
Deutsche Bank AG of Goldman Sachs Group Inc. has hired Gabriel Costello to trade additional Tier 1 bonds, as German lender Nick Gray exits the industry.
Japan Post Insurance has hired Minna Nakazura, formerly chief credit strategist for Japan at BNP Paribas Securities, as an executive partner. In his new role, he will develop insurance finance and economic research for both Japan and overseas.
