Warning signs

Gold just broke through the $4,000 mark which is not a good sign. It has doubled in price over the last 19 months and It is telling us that something in the system is not working properly. But, what is it? It may be a combination of factors, but debt is perhaps the most important one. So far, it has been government debt and the inability of Congress to reduce spending. In the public corporate debt space, spreads are very low, and nothing seems to indicate trouble. However, in the private credit space, the recent dive on the price of publicly traded BDCs (Business Development Companies), indicates that there may be some stress brewing. We recently saw that defaults in the space raised to 8% on 2025, even after loan modifications, which is not a good sign, and as you can see in the chart below, the recent performance of BDCs indicates that investors are questioning their credit worthiness, particularly when you take into account that average current yields for BDCs is around 14%, which is 1000 basis points above Fed funds/SOFR, a spread tha should be enough to make the space attractive, and yet, here we are. Some of the BDCs in the chart below are down 30% YTD. Is the credit market starting to turn, or it’s a temporary hiccup? Since the private loan space is mostly floating rate based, if the Fed lowers interest rates at the end of the month and BDCs don’t react, we might have our answer.

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Chart source: Fund@mental