Credit Is Splitting in Two, and the Split Runs Through the Lowest Ratings

Two CCC markets

Janus Henderson portfolio managers draw a line inside the CCC market that matters more than the rating itself. Performing CCC bonds are those trading above 60 out of 100 of face value, while distressed CCC bonds trade below that level, and the likelihood of default among some of the distressed portion is high. Treating the two groups as one market misreads both. m:…5662

The performing group still pays for its risk. Its spread averages around 635 basis points, Janus Henderson reports, and its yield is closer to 11.5 percent, with what the managers describe as attractive yields and potentially improving fundamentals. US nominal GDP growth expected in the 5 percent area over the coming year provides a supportive backdrop for deleveraging, in their view. m:…5662

The refinancing wall is what separates a story about yield from a story about survival. Forty percent of US CCC bonds mature in the three years to September 2029, and 55 percent of euro CCC bonds face maturity within three years. A borrower that can refinance at a spread near 635 basis points is in a different position from one trading below 60, and the calendar will force that distinction into the open. m:…5662

The same split in private credit

State Street Global Advisors makes a parallel argument about private credit: it is not a single asset class, and performance varies significantly with the underlying credit. About 95 percent of the private credit market is private investment-grade credit, the firm notes, while recent headlines about private credit stress focus on sponsor-backed middle-market direct lending. The stress story and the market are different sizes. m:…1781

The investment-grade corner looks, on State Street's numbers, much closer to core fixed income than to stressed lending. Its IG Public and Private Credit ETF carries a 0.97 beta to the Bloomberg US Aggregate Bond Index, asset-backed finance instruments have historically shown low-to-moderate correlation to corporate credit performance, and its tracking error ranks among the lowest 4 percent of peers in its Morningstar category. m:…1781

The stressed corner has a specific address: software lending through business development companies. BDCs have lent approximately 115 billion dollars to software companies, State Street reports, and BDCs underperformed broader high yield markets by approximately 5.3 percent over the past year. Exchange-traded BDCs have underperformed the IG private credit ETF by nearly 16 percent since its inception, a gap that says the market is already pricing the difference. m:…1781

Janus Henderson adds one more pressure point for software credit specifically, flagging artificial intelligence as a risk to future high yield software cash flows. A lender to software borrowers is therefore exposed twice: to the refinancing wall and to a technology shift that could change what those borrowers earn. m:…5662

Higher for longer as backdrop

State Street's high yield update for the third quarter of 2026 puts rates, not defaults, at the centre of the recent repricing. Corporate fundamentals in the high yield sector remain healthy with low default rates, the firm says, spreads remain relatively tight, and carry is the principal driver of potential returns. Higher funding costs and growing dispersion are creating pressure on lower-rated, refinancing-dependent issuers, which is where the split bites. m:…6458

Meketa frames that backdrop as a regime change rather than a cycle. US institutional investors operated in a low interest rate environment between the global financial crisis and the end of 2021, the firm notes, and during that period investors treated cash as a drag on returns. Those conditions no longer hold, and institutional investors now need to evaluate what sustained higher rates mean for portfolio management. m:…4613

This suggests the useful distinction for the next year is not high yield versus private credit, but performing versus distressed within each. State Street's prescription for high yield portfolios is an up-in-quality approach, and the numbers above explain why: the income is still there, but it is concentrated in borrowers that can survive refinancing at higher rates. m:…6458