Private credit yields reach 10-year high

Private credit yields are at a 10-year high of 11.65 per cent on average, according to a new report from Brookfield Oaktree.

The asset manager’s latest quarterly alternatives review found that despite recent rate declines, private credit yields are holding up. However, the asset manager added that this is somewhat tempered by an increase in both realised and unrealised losses, which remain below historical averages.

Brookfield Oaktree noted that the Fed’s rate cut was a “significant development” in the last quarter, but added that the firm’s economic outlook is still mixed due to geopolitical tensions and the potential volatility associated with upcoming US policy shifts.

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The Fed has projected additional cuts by the end of 2025, which has led Brookfield Oaktree to predict how private credit might perform in three different economic scenarios: a hard landing; a soft landing; or no landing.

In a hard landing situation where the Fed slashes rates more aggressively than expected, credit spreads could widen. In a soft landing scenario, the asset manager believes that credit spreads are likely to remain largely unchanged. In a no-landing scenario, credit spreads could tighten.

“Today, we believe the soft- and no-landing scenarios are the most probable,” said Brookfield Oaktree.

“In those environments, it is critical for investors to seek to maximise income to drive portfolio returns, without relying on long duration positioning that would require further rate declines to boost performance.”

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The asset manager added that alternative investments can offer potential solutions for investors by providing diversification, income, hedging against inflation, and the possibility of higher yields.

“It’s also worth noting that in the most likely scenarios – a soft- or no-landing scenario – spread compression would likely be prevalent and felt across all fixed income assets; in other words, a full-scale repricing of the fixed income landscape,” added Brookfield Oaktree.

“But private credit yields remain at about 11 per cent today, which is still well above other fixed income asset classes. Meaningful illiquidity premium remains, and, against a backdrop of a soft-/no-landing economy, a shift to more liquid assets might not be necessary for long-term investors.

“Relative to other fixed income alternatives, in this scenario, private credit would continue to provide investors attractive income.”

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