For investors’ next marginal fixed income allocation, we believe high yield bonds could be worth considering against private credit in the current environment.
Private credit’s “illiquidity premium” may be getting squeezed
Our conversations with investors suggest the “illiquidity premium” in private credit markets has narrowed over 2026. Private credit is relatively opaque, but business development company (BDC) income yield trends may indeed reflect a narrower premium (Figure 1).
Figure 1: The illiquidity premium within private credit may have narrowed over 2026 so far1
Private credit default rates, also appear to be ticking up (Figure 2).
Figure 2: Two measures of private credit default rates have been ticking up2
There are some concerns that default rates could increase further. Private credit sector concentrations in areas such as software, healthcare rollups and private equity-backed middle-market borrowers (Figure 3) have also raised some concerns.
Figure 3: Private credit may be increasingly exposed to leveraged buyout financings3
Private credit management fees typically range from 0.75% to 1.5%, with performance fees of up to 15%4, forcing investors to think closely about net compensation for risk from new investments.
Liquidity is also coming under the microscope. At the semi-liquid end of the market, BDC redemption requests exceeded the typical 5% quarterly limits at several funds in Q1 20265. In June 2026, the CFA Institute argued that growing private market allocations require asset owners to enhance their liquidity planning, governance and risk-management capabilities.
Private credit is facing more intense regulatory scrutiny, reflecting broader concerns
In May 2026, Treasury Secretary Scott Bessent met with the NAIC to discuss insurers' growing private credit exposure and offshoring of reserves through affiliated reinsurers. Also in May, the Financial Stability Board flagged concerns around hidden leverage, liquidity mismatches, and opaque pricing in private markets. This echoed EIOPA’s warnings last December to European pension funds and insurers that valuation opacity, illiquidity and interconnectedness between insurers, asset managers and private equity firms could amplify risks during periods of market stress.
Studies discussing private credit exposure have also drawn media attention. For example, Moody’s found US life insurers held ~$807bn in privately rated debt at the end of 2025, representing ~20% of the industry's $4 trillion fixed-income holdings.
Is high yield worth considering over private credit for new allocations?
A narrower illiquidity premium may make high yield worth considering as an alternative for new capital allocations.
At present, all-in yields on high yield corporates, at ~7.3%, offer a potentially compelling entry point6. Credit spreads may be historically narrow, but we believe this is partly justified by market fundamentals. The share of BB bonds in the US high yield market was 34% in 2000 and has risen to 55% as of June 30 20266. The share of leveraged buyouts financed in high yield has also been falling (Figure 3). Default rates have averaged less than 1% since the pandemic, and we believe fundamentals should keep them historically low (Figure 4).
Figure 4: US high yield default rates have been low in recent years and we expect them to remain contained6
Public fixed income mandates tend to have materially lower fees than private credit mandates, particularly for systematic strategies.
We believe the question is not whether private credit is still investable, but whether the premium on new investments after potential excess fees, potential excess credit losses and liquidity costs currently looks attractive relative to liquid bonds.
1 MarketVector, S&P, Bloomberg (MarketVector US Business Development Companies Liquid Index dividend yield, S&P UBS Leveraged Loan Index yield to maturity), June 2026. BDC distributions reflect leverage, fees, portfolio risk and dividend policy.
2 JP Morgan, KBRA, Fitch, June 2026. KBRA default data includes non-accruals.
3 JP Morgan, KBRA DLD, July 2026
4 Callan, March 2026
5 JP Morgan, June 2026
6 Bloomberg (Bloomberg US High Yield Corporate Index), Insight, July 2026
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MC771-23-09-2026 (6M)
