Credit woes

The credit market is starting to get interesting. First, tech companies are tapping the bond market to finance their aggressive CapEx commitments, increasing supply, but at the same time, we see that Microsoft bonds are yielding less than treasuries, as investors (and rating agencies) believe it carries less risk than the US government, even though the later can tax the former and the bonds are less liquid. Treasury yields are trending down, despite the risk of a government shutdown, as the expectation of another rate cut in October weighs more than what seems to be a temporary problem. But the most interesting story might be happening in the private space: in the chart below you can see the default rates for private credit, and they have surpassed 8% in 2025 measured as of August. In fact, as per the WSJ, smaller companies that are cash short and face high interest rate payments, are increasingly including payments in Kind (PIK) in their covenants, which is a sign of credit deterioration. The wind is on their backs at the moment, as most rates are floating, and lower Fed funds will potentially lower interest payments (until they hit rate floors) but the fact that defaults are rising is a sign of stress that has not permeated into the public credit markets yet. For how long?

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