Tight Spreads Don't Last Forever

Credit spreads have rarely been this tight. Investors are being paid less and less for taking on credit risk. This is a direct reflection of how much capital has flowed into private markets and “Non-Bank Financial Institutions” (NBFIs). The private credit boom has pulled yield-hungry investors away from traditional lenders and into structures that look safe, until they’re not.

Last week, we saw the first real cracks. A handful of credit names and private debt funds wobbled, sparking brief risk-off moves across the financial sector. It wasn’t systemic, but it reminded markets how fragile confidence can be when spreads are priced for perfection.

The broader market is searching for a reason to turn defensive. Every bull market finds its next wall of worry, and credit may be this one’s. If stress among NBFIs spreads, it could ripple through liquidity, corporate refinancing, and even equity sentiment. This is especially seen within financials, which now hold record exposure to private debt and business development companies (BDCs).

I don’t think that this is a call for panic. The system today is far stronger than it was in past cycles, and the cracks so far are small. But they’re worth watching. For investors, that means being selective with financials, avoiding firms most levered to private-credit risk, and remembering that tight spreads rarely stay that way forever.