Displaying items by tag: credit

With U.S. GDP dipping negative in Q1 and tariffs clouding the policy outlook, concerns are mounting over how resilient the American consumer truly is. Rising credit card delinquencies point to financial strain, especially among lower-income, lower-FICO borrowers, while looser post-pandemic underwriting standards and inflation have only added pressure. 

In contrast, higher-income consumers—especially homeowners—have largely weathered the storm, thanks in part to low fixed-rate mortgages and tighter lending practices in recent years. 

This divergence is pushing savvy investors to focus on more defensive segments like asset-backed residential credit and small business loans with strong underwriting. While these may offer slightly lower yields, they come with greater resilience and the potential for long-term stability amid an increasingly bifurcated market. 

Finsum: As credit performance grows more uneven, navigating this environment requires a sharper eye on borrower quality and a flexible, informed investment approach.

Apollo Global Management Inc. is exploring the possibility of establishing a trading desk to buy and sell direct loans in the $1.7 trillion private credit market, which is typically illiquid. While the plans are still preliminary and could be abandoned, Apollo’s interest follows similar moves by other firms like Golub Capital and JPMorgan Chase. 

These firms are actively trading private loans, although such transactions remain rare due to lenders' preference to hold debt until maturity. Concerns exist that increased trading could undermine the benefits of direct lending, such as privacy, convenience, and price stability. 

However, secondary trading could be attractive to investors looking to enhance liquidity or reposition their portfolios. As the private credit market evolves, trading direct loans might become more common, especially for distressed assets.

Finsum: As a key figure in the space its important to keep an eye on the changes Apollo is making in private credit. 

The rapid growth of private credit lending beyond its traditional markets highlights concerns about its opaque nature and potential risks to the U.S. economy, according to Moody's. Non-bank private credit lenders are increasingly competing with traditional banks by offering non-publicly traded debt to mid-sized corporate borrowers. 

This trend has expanded into alternative lending opportunities such as asset-based financing. Despite banks refinancing significant debt and providing leveraged loans for M&A deals, private credit lenders are finding new opportunities. 

Regulators and the IMF have expressed concerns about the potential risks and lack of transparency in this growing market. Four major alternative asset managers have significantly increased their credit assets under management, further highlighting the sector's rapid expansion.

Finsum: We probably aren’t close to a regulation overhaul with private credit but transparency is worth considering. 

Blackstone aims to expand its European private credit fund, ECRED, by doubling its size within the next year, having already secured €1bn from affluent European investors. Launched in 2022, ECRED strives to match the success of Blackstone's $54bn US fund, BCRED. 

This move aligns with similar initiatives from Goldman Sachs, CVC, and Ares, reflecting a rising interest in private credit investments across Europe. Initially facing regulatory hurdles and cautious investors, Blackstone is now focused on expanding its market reach and adding more distributors. 

ECRED, which invests primarily in private credit assets with a portion in liquid assets, seeks to leverage the thriving $1.7tn market for private corporate loans.

Finsum: Private Credit offers the ability to capture yield in uncorrelated markets and could be helpful for those seeking alternative returns. 

The rally in bonds since Fed Chair Powell’s pivot at the December FOMC meeting has been fully wiped out following recent economic data and a more hawkish than expected FOMC at the February meeting. 

Over the last month, forecasts for the timing and number of rate cuts in 2024 have been severely curtailed. Entering the year, many were looking for 6 rate cuts with the first one in spring. Now, the consensus forecast is for 3 cuts, starting in July. This is consistent with FOMC members’ dot plot at its last meeting.

The narrative is clearly changing with some chatter that the Fed may not cut at all. Prashant Newnaha, senior rates strategist at TD Securities Inc., noted that “January CPI is a game changer — the narrative that Fed disinflation provided scope for insurance cuts is clearly now on the chopping board. There is now a real risk that price pressures will begin to shift higher. The Fed can’t cut into this. This should provide momentum for further bond declines.”

Given these developments, Amy Xie Patrick, the head of income strategies at Pendal Group, favors corporate credit over Treasuries. She views the strong US economy as providing a tailwind to risky assets, while making Treasuries less attractive. 

Finsum: Bonds have erased their rally following the December FOMC meeting when Chair Powell signaled that rate cuts win 2024. Here are some of the drivers and thoughts from strategists.