IG & HY Strategy: Fog of War

Research evidence excerpt

IG & HY Strategy: Fog of War

ngines of the US economy are still fairly narrow in scope. But what seems

clearer is that the headwinds building in certain pockets of the US economy are

not yet spreading to a broader tightening in financial conditions. Economy-wide

US corporate EBITDA growth through Q4’25 is now starting to meaningfully

outpace the competition in Europe & the UK, hitting its fastest rate of profit growth

since Q4’23, and this is likely to grow again once Q1’26 data is available (Fig 6). The

narrow, yet powerful, tailwind from artificial intelligence spending continues to

surprise us to the upside.

But other metrics of US cycle health are showing enough resilience to stay

confident in $IG performance near term. Our estimates of Q1’26 early-stage (30-

89day) US bank loan delinquencies are rising for the median US bank, again a

symptom that some parts of the US economy are still struggling. Yet overall bank

loan delinquencies are barely rising, given the health of larger US bank asset

quality trends (Fig 7).

It’s a similar story with respect to private credit, where acute liquidity pressures

are not yet spilling over into broader headwinds. The latest Fed Senior Loan Officer

Survey did indicate that a net 33% of US banks tightened financial conditions on

non-bank business credit intermediaries, which is where loans to private credit

funds and BDCs reside. This is a fairly severe rate of tightening on private credit

itself. But yet at the same time, only 7% of US banks tightened financial conditions

on the much broader category of small business C&I loans (Fig 8). Our thesis is that,

eventually, liquidity pressures on private credit will force a broader tightening of US

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