Fixed Income Conversation Corner with Amanda Lynam (BlackRock) and Leslie Falconio (UBS CIO)
The desk identifies a nuanced landscape for fixed income investors, highlighting potential opportunities as fiscal impulses and labor market shifts impact economic growth. Per the full note source, the discussion by Amanda Lynam and Leslie Falconeo emphasizes the importance of both public and private credit markets, particularly in light of converging trends that may affect investment strategies. With GDP growth stabilizing around 3%, there are critical elements to consider in optimizing yield within changing interest rate environments. These insights set a backdrop for market positioning amid fluctuating risk appetites among institutional traders.
What the desk is arguing
The desk views the current environment as ripe for strategic positioning in fixed income, particularly within private credit opportunities that may yield higher returns as public credit faces tightening pressures. Per the full note source, Falconeo and Lynam discuss how the intersection of fiscal stimulus and labor market dynamics can present unique investment vehicles, suggesting a careful navigation of this sector.
As interest rates are forecasted to show modest movements, the preference for oriented credit allocations may amplify. Lynam pointed out a consolidating trend in credit markets that could see investors gravitating towards higher-yielding assets, aligning with the latest fiscal impulses.
Where it sits in our coverage
Our current consensus target for the relevant fixed income segments we track is 1.075, with a range of 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns closely with jpmorgan, which has positioned itself at the higher end of our forecast range, suggesting a bullish outlook that mirrors anticipated shifts in economic fundamentals. Overall, the expectation for stabilizing growth supports our recommended strategies but remains sensitive to market adjustments.
How other firms see it
There is a clear alignment among firms like jpmorgan and ubs advocating for opportunities in the credit space, underscoring similar themes of a transitioning fixed income landscape. Conversely, firms such as bofa remain cautious, emphasizing risks associated with potential rate hikes and their impact on yield curves.
Investors should closely monitor the USD credit market as it reflects these shifts, particularly noting the effect of Federal Reserve policies on rates and the overall economic sentiment that could ripple through credit spreads.
What the calendar says
With no immediate high-impact events on the calendar, traders should focus on current market sentiment and positioning strategies while assessing the outcomes of broader economic indicators that could emerge over the coming weeks.
01The fixed income landscape is evolving, presenting strategic investment opportunities, particularly in private credit.
02Recent discussions highlight a projected GDP growth of 3%, influencing credit market dynamics.
03Investors are advised to navigate potential shifts in monetary policy that may affect credit allocations.
04The convergence of public and private credit strategies could redefine yield optimization in this environment.
Market implications
With the current target set at 1.075, traders should closely watch how fiscal policies unfold to gauge their impact on credit markets. Attention to any signs of fed policy shifts will be critical in adjusting positions accordingly.
Risks to this view
A reversal in this outlook may occur should inflationary pressures prompt earlier-than-expected rate hikes from the Fed, negatively impacting fixed-income yields and credit spreads.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the Fixed Income Conversation Corner podcast series on the UBS Market Moves podcast channel. Joining us for today's conversation, glad to welcome back Leslie Falconeo, Head of Taxable Fixed Income Strategy for the Americas with the UBS Chief Investment Office.
We're glad to welcome to the podcast as well her first appearance with us from our partners at BlackRock, Amanda Lynham. Amanda serves as Head of Macro Credit Research within the Portfolio Management Group. So with that, Leslie, Amanda, thank you for dropping by to spend some time today with our listeners, our clients, to share your insights into fixed income markets.
Leslie, I'll now pass it over to you to lead today's conversation. Yep, thank you. Thank you, Dan.
I appreciate it. I'm so thrilled that you're on because I'm a big fan. I have been for years.
Thank you. Going back to your days at Goldman, I follow your stuff. I think you have incredible insight and you're very intuitive, so I know that this is going to be a fantastic podcast for our advisors and our clients, and I think the timing as well is actually pretty perfect as we sort of almost hit that six-month mark at the end of this month.
So just thank you very much for coming on. I really appreciate it. No, the pleasure is mine.
Thank you so much, Leslie, for having me, and I would echo those same sentiments. It's been great working with you all these years, so I'm really happy to be here. Great.
I appreciate that. So, okay, so let's get into these conversations, and I know you do a lot in terms of both print and media, and I'm sure sometimes you and I both can be asked the same questions over and over again. But let's try and think about this in terms of when we think about how the market was when we had it in this year, right?
You had years of fiscal impulse, you had rising labor force, you had immigrations, so therefore we had a GDP that was run around 3%, and when we go into 2025, the expectation was that growth was slower. That's not any really big surprise given how high it had been with all the fiscal impulse. So now that we are at sort of like the halfway mark, how do you think, how are you approaching this in terms of we're almost here at the end of six months, how are you reflecting on kind of what's happened this previous six months versus what could happen as we head into the end of the year?
Sure, sure. Okay, so I would say maybe we'll start with the macro, and then we'll dig a little bit deeper into credit. So exactly as you noted, we had benefited from several quarters of above-trend growth, and I would say inflation moving in the right direction.
Fast forward to the first half of 2025, and then looking into the second half of the year, we are expecting what I would characterize as a more challenging growth-inflation mix. So growth slowing from that above-trend pace, inflation possibly picking up in the months to come, and really, as we think about that, that does have, or should have, an impact on risk premia across risk assets, both credit and equities. I would say, though, countering that to a large degree has been a general trend of resilience that we've also picked up on, such that we have to be mindful of two-sided risks, and we need to be careful about managing the opportunity cost of being too defensive, which was, in my view, one of the key takeaways from 2024, actually. 2024, it was led by, in the credit market, for example, outperformance of lower-quality credit, even as, for example, defaults had picked up.
It actually wasn't enough to do well performance, and we could get into that in a later part of the segment of the conversation. So as we think about it, a more challenging growth-inflation mix, although it hasn't, I would say, decelerated in terms of growth to the extent that many would have expected, and I think that's a positive thing. And so when we think about the go-forward, one trend that has been firmly in place has been this trend of dispersion, and you see this across the U.S. consumer's financial strength.
You see it in areas like commercial real estate. You see it in liquid credit, private credit, and what I think it's telling you is that we're really no longer in this rising-tide, lift-all-boats environment. We need to pay a lot of attention into the cross-section of performance, so it won't be just about picking sectors, for example, but actually picking the winners within those sectors or those certain asset classes, and I think that's really where we are focused on.
So that's the macro. It's a challenging growth-inflation mix, but very mindful of two-sided risks. On corporate credit, we're fairly constructive on corporate credit for a host of reasons, but I think you just need to be mindful on why you would be buying credit in this environment, and we've really been emphasizing the all-in yield and the carry proposition of the asset class as reasons to allocate to credit, and we are placing less emphasis, for example, on the prospect of tighter spreads or lower rates as a boost to total returns, which, as you know, Leslie, have historically been the drivers of total returns in credit.
So it's really about carry and income. The technicals are also quite robust in corporate credit, so again, being mindful of those two-sided risks. What we've seen, really, even since the volatility of last August, but certainly in the volatility of April, is that episodes of widening in corporate credit, spread widening in corporate credit, have been relatively short-lived.
The common refrain that we hear from a lot of investors is, oh, I wish I would have taken more advantage of that across a wide range of market participants, and so I think that will be a common theme as we move towards the second half of the year. So when we think about that, and by the way, I agree with everything you said, and when we think about, you know, look, we go into this year, right, spreads were tight, there's no question. No one was expecting, you know, a huge amount of spread compression.
It was about, you know, that compounding income, you know, earning carry as a challenge or total return. But we know as things have sort of, as trends spread, I mean, companies can adapt, right, they have adapted, but now that we know that it wasn't, you know, that tariffs in and of itself were this big surprise after the election, right, because we knew that was part of these policies. Maybe the depth in the sequence is really what caught the market off guard, but how do you think that with these policy announcements, you've said, like, cyclical, non-cyclical, how do you think that this has, like, impacted, say, fixed income, and particularly credit that, you know, maybe you either expected or didn't expect?
Sure. I would say one of the things that's actually jumped out to us is that oftentimes in periods like this, it feels like the common refrain from market participants is, let's move up in quality. Let's counter uncertainty or market volatility with moving up in quality.
And maybe that's been one of the counterintuitive and maybe out-of-consensus views that we've had is that during this period of, I would say, you know, shifting narratives in the market, we've actually advocated for a stance of selectively moving down in credit quality. And it may sound a little bit shocking, but maybe hear me out. And I would add, so far, it's actually been working in terms of total returns, so high yield has actually outperformed investment grade so far this year, so I think there is some merit into this, that, one, on a fundamental basis, there's been a lot of convergence across the quality spectrum in corporate credit.
So, for example, the high end of high yield, double Bs, almost 50% of the U.S. high yield market, and you can see this on Bloomberg, the trimmed mean net leverage, so excluding the outliers, the net leverage of the double B pocket of the high yield market, the high end of high yield, is exactly the same as the low end of investment grade, or triple Bs. So, actually, you're not giving up a ton in fundamental strength by moving down into the high end of high yield, for example, or alternatively, if you're in the very highest rung of investment grade, actually, you're still pretty comfortably within investment grade territory by investing in triple Bs, but you're actually picking up some additional spread. It has been one of the counterintuitive results where we're pushing back against what we sometimes view as a reflex to move up in quality, and being a little bit more granular about it, saying, okay, fundamentals have been converging between these two markets.
Actually, the technicals in the high yield market are exceptionally strong, both on the supply and the demand side, driven by a modest amount of net issuance, yield-based demand, improved balance sheet strength on the fundamental side, and you also have less duration exposure in the high yield market. So, when you think about the volatility in the treasury market, as the market is concerned about things like the budget deficit, for example, which many have commented is on an unsustainable path, you are somewhat more insulated from that volatility in the long end treasury market by being in high yield, which is a shorter duration product relative to investment grade. Now, your question specifically on trade policy, Leslie, first of all, I think we're considering trade policy and shifts in trade policy in the context of the broader policy package.
So, that could include things like the tax bill, deregulation, hopefully some improvement on the fiscal situation. So, we're taking all of those things in totality, but I think what it's really done is it's shined a light on companies that have pricing power, that have strong brands, that have a flexibility in their supply chain. In our granular review of company transcripts, it's very clear that companies have been thinking about supply chain resilience really since the pandemic to a large degree, but some even in the years prior to that.
So, I don't think it's a new subject for most companies, but it is something that's gaining a lot of focus, and I think really what it's going to do is separate the winners from the losers in this environment on a host of different factors. And I would say the one area where we continue to tread carefully are on these so-called left tail pockets of the market, whether that's in liquid credit, private credit, commercial real estate, that were already under pressure prior to any fundamental deterioration in the economic backdrop. If a company was already having trouble growing into its capital structure or a sector was already having trouble navigating the market environment, there's really not much on the horizon that makes us think that it will get any easier for those sorts of situations.
And so, those are areas that we are watching very carefully. Maybe I'll call one out specifically, which would be the triple C pocket of the high-yield market. Last quarter, again, using that trimmed mean interest coverage metric, it was already below one time.
It's rebounded a little bit, but what that shows you is that that sector of the market is already under fundamental pressure, and so we would tread very carefully. And that's really when you rely on kind of back-to-basics, bottoms-up credit work by an analyst to really pick who can make it through kind of the other side of this volatility and what companies to avoid. I think that's one of the things, and we're going to get into this a bit later in the conversation regarding private credit, and I definitely want your thoughts on that.
But one of the questions that I had recently gotten, which I thought was pretty interesting, and I want to ask you your thoughts on this, is that if somebody asked me, what assumptions did sort of investors bring into the process this year that actually should be questioned? One of the things that you actually had said earlier, which I completely agree with, is that people being too defensive. And I think that one of the sort of drivers this year, and I'm not saying it's completely understandable, but with this heightened uncertainty, people are having cash, people are staying on the sidelines.
And that obviously, look at the recovery since April, has not necessarily been the best strategy to deploy. So what do you think, how would you look at it? I know you mentioned defensiveness, which is actually 100%.
I completely agree. What do you think kind of has been in the investment process this year that should be maybe questioned a little bit? Sure.
I would say two things. One, there seems to be an expectation, and I would say not even just heading into this year, but for much of 2024, that the Fed would be easing policy to a pretty material level. And we have been pushing back against that really all through 2024, and even at the start of 2025.
And our view is that actually preemptive near-term interest rate cuts were unlikely from the Fed. And we're recording this on June 17th, so a day before the June FOMC, but we are not expecting a change to rates tomorrow. And I think an environment of structurally higher interest rates has been our base case for a while, even when it was far from consensus.
And I think that has real implications for the corporate credit market in terms of, again, going back to the value proposition of yield and income and carry in an environment like that, and spurring some of that yield-based demand, which has been a really supportive technical. And that was probably one area of the market where we've been pushing back most aggressively on the macro side, that basically the bar for the Fed to normalize policy was quite high, never mind ease it. And there's a distinction between normalizing, becoming less restrictive, and actually moving into accommodative territory.
We thought the bar for normalizing was quite high, and then certainly thought the bar to high with inflation above target. And likely, and Chair Powell said as much, most of the progress on reducing inflation is probably going to be stalled in the medium term. He said that a few months ago.
We've had some favorable prints since then, but I think the direction of travel probably argues for inflation that is remaining well above the Fed's target, at least over the medium term. I would say the second area where the market, we were pushing back a bit, is on this idea that high yield spreads at the tight end of the range was somehow unwarranted. And again, this is not a specific to 2025 view, but this had also been the case in 2024.
And we had been making the argument that, no, actually, high yield spreads probably could reach a new post-financial crisis tight level in 2024 for a host of reasons, not least of which is the fundamental improvement that I mentioned, the very proactive refinancing and kind of extending of near-term maturity walls, and the yield-based support. And just to drill down on that for a minute, in 2021, high yield spreads had reached, and I'm using the Bloomberg index, the LF98 index, high yield spreads had reached a level around 262 basis points, I think it was. And back then, the yield environment was actually much lower in terms of the risk-free rate and treasuries.
And so at various points in 2024, we were making the case that, actually, we probably could revisit those local tights because the yield-based backdrop for high yield credit is just all the more supportive as interest rates were higher. And I think a lot of investors, going back to the point on being maybe too defensive, were kind of shunning high yield credit risk at that time because they just looked at spreads and they viewed them as too tight and that you weren't getting compensated. And that was maybe even when spreads were at 400.
We actually did make new post-financial crisis tights in early February of this year, but there was a pretty directionally clear trend of tighter spreads. And I think it was just the confluence of factors that helped propel the market. And I think what we learned is that we need to, in some instances, kind of question the rulebook, right?
So in an environment where, historically, high yield spreads below 400 basis points might have been viewed as tight, let's think about the confluence of yields and technicals and fundamentals that might cause us to question, hey, actually, maybe we could reach a new local tight here. And so that was one thing that we pushed back against a fair amount. Now, we changed that view earlier this year to start calling for wider spreads as some of the facts began to change around the macro.
But I would say even given our expectation for wider spreads, they did not even last as long as we thought they would. And actually, what we saw is that weakness was short-lived. A lot of money came in to the market.
You can see that in fund flow data, but as you well know, fund flows only capture a portion of the market. And so you can see pretty clearly that there's a fair amount of demand for corporate credit. So those would be the two things, I think, the assumptions is that the Fed was going to ease, push back against that, and that high yield spreads were too tight.
And our view was, yes, they look optically tight, but there are reasons for that. And in fact, we wrote a piece in October of 2024 called Warranted Resilience. And it was exactly for that reason.
Do you think high yield could have gotten that tight without private credit? I do. You do?
I do. I mean, I think it was kind of fascinating during the pandemic, there were some high yield firms that were refinancing in the high yield market, by the way. So nothing to do with private credit.
Those firms were refinancing three, four years in advance. And so just the sheer quantum of balance sheet productivity and discipline from the high yield market in clearing out near term maturity walls, refinancing capital structures, raising liquidity during the pandemic set them up very well for, I think, to navigate that backdrop. The other thing that I think is indicative of some of the structural shifts in the public debt market is that I remember in the early days of the pandemic, there was a lot of concern about, and questions about, can the high yield market absorb the wave of fallen angels from investment grade into high yield that occurred during the pandemic?
This was before the downgrades actually took place. There was some question about, can the high yield market actually have the capacity to take on 200 plus billion of debt? Fast forward, what we found is that actually, yes, the high yield market easily absorbed that.
And now, in my view, there's a much less punitive implication from being downgraded from investment grade to high yield. Of course, if you're a management team that needs to be investment grade, that can be problematic for your business. But in general, I feel like there's a lot more fluidity between the investment grade and high yield markets.
I think the high yield market proved its capacity to really function across a wide range of markets. I think the growth of portfolio trading and fixed income ETFs has aided in risk transfer. There are some, I would say, tangential implications and benefits from private credits growth that have allowed borrowers more options in where they're financing.
But I would say most of that overlap has actually been between the syndicated leveraged loan market and private credit, which are both floating rate asset classes, as opposed to between the high yield bond market and private credit. So I actually view the dynamics in the high yield bond market pretty self-containing. Of course, on the margin, private credit has opened up a different avenue for financing.
So, sure, maybe some of the more stressed borrowers that require a more bespoke solution, a longer term partner, they may have gone to private credit. But I think that directional trend would have remained in place in high yield, just owing to the fact that those borrowers have just been so proactive at improving their own balance So when we think about... Let's just stick with the high yield side here, because I know we're going to go deep into private credit a little bit later.
Let's just talk about high yield in general. When we think about where we started the year, and even during the widening that we saw in April, I mean, the delta was high, but the absolute level was not something that was... When you look at...
People look at the 20-year percentage of where we were, the percentile of where we were, it's not like you'd gotten really that wide, right? It was just the delta that was a lot. So if you look at, say, high yield, and we know, we're not calling for a recession here, we don't believe there's going to be a recession, but if you had to think about A, a potential recessionary spread, that's the first question I want to ask, and B, just your thoughts on, and we don't believe this, but the sort of like the downplaying or say of US exceptionalism, which we don't look at that, we believe that's still in play.
I mean, this year might be fundamentally a shift, but it's not a structural shift. What do you think of euro high yields versus US? I know there's a couple things that I'm asking you there, so I'm just curious.
Yeah, sure, sure. Yep, so starting with the first question, so the rough levels that we would view as in US high yield reflective of a moderation in growth, I would call that anywhere between 500 basis points to 600 basis points. So that would be kind of a non-recessionary, yet pretty material sharp slowing in growth.
That's where I would care, because the midpoint of that range would be something like 550 basis points, more close to 300 at the moment. And then when I think about a recessionary type level, there I'm thinking around the context of 800 basis points or so. That's how I would think about what sort of growth deterioration is the high yield market reflecting.
Again, acknowledging that we are at the lower end of the historical range, we're not at the absolute height, but we're definitely towards the lower end of the historical range, but understanding that all else equal, high yield spreads might be wider, but there are some real counteracting forces, including favorable technicals, improved fundamentals, to name a few. That's how I would think about that. In terms of diversification outside of the US, I would say yes, actually very much agree with you that there is a pretty attractive opportunity in non-US markets, and that's true in both liquid and in private credit.
Using your example of the European high yield market, actually it tends to be a higher quality market. There's a lot less triple Cs, for example, in the European high yield market. Actually, for investors that are global and are kind of hedging that back into different currencies, that may actually be also another tailwind.
And I would say just on the margin, in our conversations, we just sense that the dollar has a higher chance of being allocated, say for a European investor, the marginal dollar has a higher chance of being allocated at home, as opposed to in the US, now that there's a return of yield support in that market. So it actually has, in our view, less to do with US exceptionalism potentially fading, which again, I don't agree that it is either, but more so that Europe, for example, had many years of negative interest rates. And now they have finally the return of yield support.
There's a lot of optimism around fiscal spend, infrastructure build out, defense spending, a lot of optimism around the establishment of a capital markets union in Europe. In totality, that should argue for more supportive growth over the medium to long term. Now a lot of that hinges on execution and getting that done, but I do sense a fair amount of optimism from investors outside the US to possibly deploy the marginal dollar at home.
And I think that's probably a good thing. The other thing I will say, too, is something that is maybe not talked about as frequently anymore, but the European Central Bank still owns a decent portion of the European IG corporate bond market left over from its legacy corporate bond purchase programs, whether that's the corporate sector purchase program or the pandemic era purchase program, that's winding down or they're not doing active purchases, but they still have a stock of bonds that they hold. And so what we believe has happened is that because a chunk of the investment grade market is held by the ECB, it's almost in some ways forcing investors or encouraging investors to move down the quality spectrum because there's just a lack of bonds available to buy.
And so that also lends some support to the lower quality segments of the European corporate bond market in addition to, for example, the European high-yield market already skewing towards a higher rating relative to its US high-yield peers. So very constructive on credit in Europe just as much as in the US, actually. I think there are some uptown ones there.
Yeah, we agree with that. I mean, we do have a tendency, I mean, to right now I would say we're a little more on the neutral side, but I definitely understand the point, particularly when it comes to the higher current quality. But again, we're just not – yeah, there's no question about that.
But let's sort of keep on that topic and talk about – I do want to shift back to the private credit part, and I know that you kind of gave a good foundation in terms of speaking about the difference between public and private. We get this – this is a question we get quite often from our clients. One is that just to talk about the convergence of public and private, like what are your thoughts there?
Is it moving too quickly? You know, both in terms of – we focus more on the US, but Europe is fine. I'm just really curious your thoughts there.
Sure. So it's a great question. I would say at a very high level we believe a few things.
One, the definition of private credit is changing, so it is no longer reserved for niche pockets of the market, really small financing situations. By contrast, its addressable market of both investors and borrowers is expanding, and what that means is that as private credit is now sizable and scalable as a standalone asset in its own right, it's able to write bigger checks for larger deals. It's able to reach areas where it previously could not.
And again, it's no longer reserved for those kind of bespoke financing situations. And we've had an above consensus growth forecast on private credit for a while. We maintain that, and I would say are very cognizant of the fact that actually just the definition of private credit is expanding to include really anything that can be originated, structured, and held by a lender.
That could include investment-grade private credit. That could include private asset-based finance. That could include companies that could access in the public debt markets if they wanted to or have access in the public debt markets, but for whatever reason are choosing to add private credit to their capital structure.
To the point on has it grown too much? Is it too big? No, in our view.
In fact, if you take the largest segment of the private credit market, so that traditional, what we would traditionally view as private credit, which is North American direct lending, actually there's a lot of scope for growth in terms of the amount of investors that are participating in the asset class of those investors, what their target allocation is, and especially, and actually I just gave a presentation on this actually earlier today, when you look at private credit relative to markets such as the U.S. investment-grade market, the North American private equity market, the amount of loans on bank balance sheets, actually private credit pales in comparison to the size of those markets. So, and right now private credit is only 11% of the alternative universe as measured by Prequin, which is currently dominated by private equity. So, we think there's a lot of room to grow in the traditional sense of private credit.
We don't believe that it's really anywhere near saturated. And also, we see a lot of scope for private credit addressable market to grow as well into areas that maybe historically were serviced on the bank balance sheet, but actually the regional banking disruption of March of 2023 showed us that maybe in some instances the best place for certain loans is actually in the private credit market where the assets and liabilities are more closely aligned as opposed to in the banking channel where short-term deposits are in some ways used to fund long-term loans. So, a lot of room for growth there.
I would say that said, this asset class isn't immune to a growth downturn. So, just like liquid credit or public equities would be impacted by a growth slowdown, so too would private credit. So, the theme of dispersion is very much alive and well.
You can see that dispersion in company performance. You can see that in dispersion in manager performance. You can see it actually in dispersion in fundraising.
Actually, since the Fed started hiking rates in 2022, the vast majority, call it upwards of 85% of private credit fundraising, has been driven by managers with four or more vintages. And in fact, new entrants in private credit have raised low single digits amount of private credit fundraising since 2022. It's actually on average 4%.
And by the way, those extremes have become more prominent since 2022. If I were to look at, say, how much new entrants raised in 2019 to 2021 before the Fed started hiking rates, it was actually 11%. And the number of established managers, the share of established managers from 2019 to 2021 was around 72% instead of the 85%.
So, the punchline there is that as the cost of capital has become more expensive, that investors are more selective with where they're allocating their capital. They're prioritizing managers with workout expertise, restructuring experience, the governance, the compliance, the oversight that they need to manage this environment. So, a lot of room for growth in private credit, but it's not going to be a rising tide lifts all boats.
Importantly, there's going to be dispersion. Just like any asset class that is exposed to growth. The other part of your question was on the convergence.
And we see that convergence in a few ways. We see it in, for a given company, maybe they're refinancing liquid credit with private credit or vice versa, depending on market conditions, depending upon what's going on in their business and what they need at that moment in time in their growth journey. We see it in banks partnering with private credit so that they make sure that they have a private financing option in their toolkit, almost like a product agnostic approach.
Those are, I would say, the two areas where we see that most prominently. But the other point that I would emphasize and have emphasized is that if you actually look at the amount of companies in the U.S. with 100 million or more in revenue that are private, it's actually 85% of companies in the U.S. that are with 100 million or more in revenue. Excuse me, it's 81%. 81% of companies in the U.S. with 100 million or more in revenue are private.
And so if you want to contribute to the growth journey, if you want to capture alpha from investing earlier in a company's growth cycle, the private markets are a way to do that. And by the way, you asked about Europe earlier. Actually, if you look at Europe and the U.K., around 93% to 94% of companies in those regions are private.
So think about how big a company needs to be before it's accessing the liquid markets. We track stats on average deal sizes across these markets. And the average deal size in the U.S. high-yield bond market, for example, has been comfortably above $700 million since 2020.
And that's a deal. That's not even an entire capital structure. So a company that is accessing the public markets these days is just so large that a lot of the proverbial juice has been squeezed from the investment by the time it gets to the public markets.
And so that is also, I think, a reason why you are seeing the growth of private credit and private financing because actually just a large swath of the market is private. And I think investors are wanting to capture alpha to the extent they can. They don't want to wait until a company makes it to the public markets because the company is already so big.
Right, right. That makes perfect sense. Absolutely.
And I want to ask the last question now. So what do you think the risk and opportunity of private credit? But I want you to end with the opportunity side because we want to end with a good note.
But besides that, what are the things that you'd mention? Then we agree with it as well. Listen, we're not looking for multiple set cuts this year.
We know we constantly get these convergence and divergence from what the market is thinking. We've talked about this before, looking at the fixed income market and the backward-looking Fed. So we do think the Fed will cut later in the year, not multiple times.
So when you think about that in that view, and you talked about cost of capital and all these kinds of issues, listen, it's going to be high for longer, which is great for me. As soon as that's said, I can get my high single to double-digit carry. But then, you know, the bond costs are high.
So how do you see some of these in terms of, let's start with the risks and then what opportunities you see within private credit? Sure. So I think there are a few risks that we monitor, I would say.
One is just like in liquid credit, it's a growth-sensitive asset class. And so to the extent that growth is deteriorating or companies' margins are getting pressured, that will have implications on the private credit market just like it will have on liquid credit or on the equity market. So watching risk premia there.
I would say as the private credit market grows, one of the points that we often emphasize is that illiquidity is a feature, not a bug of this asset class. And so if you are an investor, you really do need to have suitability in mind when you're allocating to alternative assets in general. And again, making sure that you are equipped to handle that illiquidity.
That would be something that I think is obvious, but it bears repeating. And then I would say the third issue is really when you think about new entrants in private credit, you just want to make sure that valuation and underwriting discipline, the ability to say no, those are things that will really set managers apart in our view. And so origination is kind of the way to source attractive investments.
You want to be capturing the widest amount of origination opportunities possible, and then hopefully those investments will prove attractive over the longer run. Established managers have the ability to have an incumbent portfolio, so they can lend to companies that they already know the management team, they already underwrote the credit. That's a really strong advantage.
New entrants don't have that. And so that's just something that we need to make sure that as new entrants enter the market. I feel pretty confident that the established managers have a very strong focus on valuation discipline rigor, but the new entrants will have to just be mindful.
The concept of adverse selection exists, for example, in insurance as well. You just want to make sure that the manager has the focus on saying no to just as many investment opportunities, if not more, than they're actually underwriting. So those would be the risks.
And in terms of the opportunities that, look, I actually think that we're in for a pretty substantial expansion of, like I said, the addressable market of both investors and borrowers in private credit. And actually, that's one of the questions that we get a lot is, is there too much capital chasing too few opportunities? That's why saying no to investments is really important, right?
But also, if you believe that the addressable market of borrowers is expanding, then actually that opens up a much wider aperture for private credit capital to be deployed. Case in point, insurance companies. Insurance companies, over time, have increased their exposure to private investments.
And part of the reason for that is that it's a really nice asset liability match. So they have long-term capital that they can match against long-term investments. That suits itself well for private markets.
But then also, in many instances, they're not reaching for double-digit returns or the riskiest part of that market. They're actually just looking to incrementally outperform the liquid markets and generate a capital-efficient yield and then compound that over time over sizable investment portfolios. So that lends itself well to private investments additionally to the kind of core market that has already been growing.
And so I think there are a lot of different avenues for private credit to grow from here. And importantly, one of the things that I don't think is discussed enough is that the stability of private credit and the ability for it to offer certainty of execution for a wide range of borrowers in a range of different market conditions, including in volatile conditions, is a really important part of the financial ecosystem in our view, especially when you think about funding some of these long-term capital projects that will require companies to be tapping the markets over a multi-year period for sizable amounts of financing. Think of some of the mega-forces that our colleagues in the BlackRock Investment Institute have talked about financing.
So the private markets will play a really large role in that. And we've seen periods of volatility in the liquid markets where, call it in April or August of last year, the public markets don't cooperate. And some of these markets are really technical, like the broadly syndicated leveraged loan market that relies on the bid from collateralized loan obligations.
And those are rating-sensitive vehicles. So in periods of market volatility, not only do markets become choppy, but actually some of the technicals can break down and cause those markets to really lose appetite for financing pretty quickly. The same goes for bank lending.
It can become more selective during periods of growth downturns just when companies need that lending the most. So the ability of private credit to step in and provide that certainty of execution for a wide range of borrowers, we think is also something that is really important for the financial system. Again, we just have to keep suitability and discipline and selectivity in mind because this is not a rising tide with all those environments.
Absolutely. And I think that's one thing that we talk about here as well, which is really important for our clients and what we have on our platform is the due diligence that our members do. It's pretty expensive.
And we know that sometimes it could be, this is definitely a sector that's had a lot of spotlight the past couple of years, which is great. But you and I have been in this business to know that you also have to come with a word of caution to your due diligence as well. But listen, this has been really fantastic, Amanda.
And I thank you so much for taking the time. Thank you. And again, I look forward to have you on the next couple of months when we may get some clarity or may not have some clarity, but there will always be opportunity.
So that is great. Thank you so much, Leslie, for having me. It was a real treat.
I really appreciate it. Thank you. Thank you for tuning in.
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