Corporate credit faces volatility as private credit stress rises, AI divides borrowers, and IG primary strength masks widening dispersion.

Neil Sun, Portfolio Manager on RBC GAM's BlueBay U.S. Fixed Income team, examines how stagflation-style stress and cross-asset volatility are reshaping the credit landscape and potentially creating selective opportunities.

1. Private credit deterioration is accelerating as BDCs report rising nonaccruals and questionable loan valuations while higher rates expose overleveraged structures in this illiquid corner of the market.
2. AI infrastructure spending creates a credit divide where mega-cap tech maintains robust capital access for data centers and long-term investments while software and leveraged borrowers face intensified scrutiny on business model durability.
3. Strong IG primary demand and open funding markets contrast sharply with rising dispersion in financials and insurance sectors, presenting entry points in defensive high-quality bonds as heavy supply and macro volatility reset spreads wider.

Welcome to The Weekly Fix. My name is Neil Sun.

What we have seen recently is a sharp repricing across markets, driven by a renewed focus on inflation and the unwind of some very crowded positions such as in European rates and EM (emerging market) carry trades. Energy prices have moved higher, global bond yields have backed up, and markets that were leaning toward lower rates and a more benign macro-outlook are being forced to reset. This is not a clean, traditional risk-off move. It feels more like a stagflation-style stress move with de-risking layered on top. In corporate credit, opportunities start to emerge as cross-asset volatility rises. Against this backdrop, three themes really stand out in credit.

First, stress in private credit is becoming increasingly important, with further headlines about capital lockups and loan write-downs circulating. This is an area of the market that tends to be more exposed to higher borrowing costs, more levered capital structures, and businesses with less flexibility. We remain cautious in this space particularly when private credit operators have been posting outsized loan growth. In recent quarters we have started to see some deterioration in asset quality metrics for various BDCs (business development corporations) including higher levels of nonaccrual. There also have been an increasing number of borrowers who are choosing payment-in-kind (PIK) options within their loan structures that allow them to delay regular interest payments with the deferred amount added to principal balance. Questions have also emerged about the accuracy of loan valuations that are reflected on BDCs’ balance sheets. The underlying loans tend to be illiquid and lack regularly quoted prices.

Second, AI is creating a real divide inside corporate credit. On one side, the biggest tech companies still have strong access to capital and can issue large amounts of high-grade debt to fund infrastructure, data centers, and long-term investments. On the other side, some software and leveraged borrowers are facing more scrutiny as lenders and investors re-assess which business models are durable and which companies could come under pressure. The gap between perceived winners and losers is widening and credit is becoming far more selective.

Third, IG (investment grade) primary market remains very strong. New issue demand is healthy, funding markets remain open, and yield-based buyers have been adding in both primary and secondary markets. Meanwhile, beneath the surface, we have seen dispersion and price dislocation rising in areas such as financials and insurance issuers. Overall, heavy supply and elevated macro volatility are likely to reset spreads wider. We see this as an opportunity to engage with the market and invest in defensive, high-quality bonds at wider valuation levels. Thank you again for watching.