High Yield Now Rivals Private Credit for New Money

What's New

For new fixed income money, high yield bonds now compete with private credit on risk-adjusted terms. BNY Investments argues the private credit premium has narrowed once fees, credit losses and liquidity costs are counted. High yield offers an all-in yield near 7.3%. US high yield defaults have run below 1% since the pandemic. Private credit default measures are ticking up. Allocators adding credit should price private loans net of all three costs before committing.

Why It Matters

The finding challenges the view that private credit's illiquidity premium is stable and reliably paid. BNY points to BDC redemption requests that broke quarterly limits early this year as proof that liquidity carries a cost. Insurers face the sharpest exposure. Private credit makes up about 20% of US life insurers' fixed income holdings. Regulators from the Treasury to EIOPA have raised concerns about opacity and liquidity.

By The Numbers

• 55%: BB-rated share of the US high yield market today. In 2000, the share was 34%.

• About $807 billion: private credit held by US life insurers at the end of last year.

• 0.75 to 1.5%: typical private credit management fees. Performance fees reach up to 15%.

• 5%: the typical quarterly redemption limit that BDC requests exceeded in the first quarter.

Reality Check

BNY draws partly on conversations with investors, an informal input. It calls private credit relatively opaque, so the default trend rests on two measures. BDC data also blend leverage, fees, portfolio risk and dividend policy, which muddies any read on pure credit losses. High yield has its own weak point. BNY concedes spreads are historically narrow, which leaves little room if conditions turn.

The Wrap

High yield takes a larger share of new credit allocations while private credit's net premium stays thin. High yield keeps gaining if private credit defaults keep rising and BDC redemptions stay above limits. It reverses if new private loans price wider and restore the premium after fees. It also reverses if high yield spreads widen from today's narrow levels and cut returns. The next 2 quarters of BDC flows and default data will decide it.