Crude prices cooled a bit after a strong run, with U.S. West Texas Intermediate at $99.02 and Brent at $103.64 at 6:35 a.m. E.T. Friday, both lower on the session. A separate read showed ICE Brent Crude (Nov′26) at 104.98, down 2.65 or 2.46%, at 3:59 p.m.
BST. The backdrop here is familiar: talk is picking up that the Federal Reserve could lift rates at its Sept. 15-16 meeting, with inflation still above the 2% target.
Rate odds moved up alongside. According to the CME FedWatch Tool, markets were assigning a near-70% probability to a U.S. rate increase this month.
Direct lending in private markets is mostly floating rate, typically set at a spread over SOFR, the benchmark for overnight Treasury-backed borrowing. When policy rates step up, those coupons reset and interest bills climb.
As oil prices spiked on Thursday during rising U.S.-Iran tensions, Anant Kumar of Benefit Street Partners, where he serves as a global investment strategist, pointed to the bigger risk facing these borrowers. "The other piece people are missing is why the Fed is contemplating a hike in the first place - this isn't a growth-driven tightening; it's a response to 3.4% [CPI] inflation with an energy shock behind it," Kumar told CNBC via email. "For a leveraged borrower that's a double hit, with input costs and wages squeezing the EBITDA on one side while the floating-rate coupon rises on the other," he said. "Inflation, not rates per se, is the biggest risk to private credit, and a hike for these reasons is exactly that risk showing up."
Kumar also noted the mechanics of floating-rate portfolios: "There's a short-term boost to portfolio yield from any hikes, but you could give that up partially in the form of higher credit losses, if some of the more marginal borrowers can't make their interest payments in the higher rate environment," he added.
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Borrower stress is already showing up. According to Fitch Ratings, over the 12 months ending in July, the U.S. private credit default rate reached a record 6.1%. Treasury markets are flashing the inflation worry too.
Thursday saw the 10-year Treasury yield jump by over 11 basis points, landing at 4.954%. A later print showed the 10-year at 4.942%, down 0.002, at 11:09 a.m. EDT.
The next pressure point is refinancing. Sunaina Sinha Haldea, serving as Raymond James's leader of its private capital advisory practice, said, "The refinancing wall is unlikely to arrive as one dramatic event." "It is more likely to be a rolling process in which stronger borrowers refinance normally, while stressed credits are dealt with through amendments, extensions, equity injections and restructurings. Rising defaults and non-accruals suggest that process is already underway." The borrowers with the thinnest cushion are the most exposed, she said: "A borrower with strong earnings growth and 2-3x interest coverage can absorb rates that would be unsustainable for a highly-leveraged business already close to 1x coverage."
Credit pros see a broader growth slowdown as the real swing variable. Lotfi Karoui, a multi-asset credit strategist at PIMCO, said, "The bigger risk is not a specific Treasury yield, but a combination of restrictive policy and weaker growth that undermines cash flows and debt-servicing capacity." He observed that a large share of the repricing to higher borrowing costs has already occurred, with tighter underwriting for new deals and many vulnerable companies either extending maturities or winning lender support. "Absent a recession, the payment shock ahead is likely much smaller than the one they have already navigated," Karoui said.
It may also take a larger rate move to fundamentally change outcomes for weaker credits. Matthew Pallai, Nomura Asset Management's CIO overseeing private credit, said, "For real concern to be raised to a point that it affects market outcomes would require at least another 50 to 100-plus basis points move for lower quality credits." He also said that many market participants on both sides expected rates to come down after peaking in 2023-24.
For your wallet, here is the takeaway you can use in conversation: higher energy costs and possibly higher rates flow straight into floating-rate loans, lifting income at first but also testing whether borrowers can keep up. What happens next depends on growth and how much further yields climb.
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