When yields climb 🧗‍♂️ toward historical highs, it's time to pay close attention, not just to returns and yields, but also to risk of principal.

In my 20+ years (actually, it's been much more, but I don't like to fossilize 🦣 myself) as a market participant through many booms 🚀 and downturns 💥, I know that when yields climb 🧗‍♂️ toward historical highs, it's time to pay close attention, not just to returns and yields, but also to risk of principal.

Yields near cyclical peaks for retail-oriented private credit (10–12%) signal late-cycle conditions, which are attractive but historically a precursor to higher default rates.

Elevated returns are fueled by higher central bank rates and wider credit spreads as lenders demand more compensation for risk.

Bank retrenchment is pushing more borrowers into private credit, especially in the middle market—classic late-cycle behavior.

Strong investor demand persists, but the spread over public debt reflects both illiquidity and rising uncertainty.

Caution: High yields often come before a wave of credit events, particularly among weaker borrowers.

Private credit is currently delivering some of the most attractive yields in years. What are these numbers telling us? When yields approach their historical highs, it's rarely just a gift 🎁 —it's a warning ⚠️. Elevated returns are being driven by higher base rates, wider credit spreads, and a pullback from traditional bank lending, all of which are typical of a late-cycle environment.

As banks become more risk-averse, private credit fills the gap, capturing business from borrowers who are willing to pay more for access to capital. This dynamic is great for yield-seekers, but it also means the market is pricing in greater uncertainty and the possibility of stress ahead. The continued flow of investor capital into private credit, despite rising risks, emphasizes the need for vigilance. I generally don't accept the reasoning that this time is different, so prior peak yields are an excellent guide to the current cycle.

Now is the time for investors to be extra selective—focus on credit quality, manager experience, and a deep understanding of the underlying borrowers. Remember, high yields are often a prelude to higher defaults, especially if the economic cycle turns downward.

If you're invested in or considering private credit, don't be lulled by high yields alone. Take a hard look 🔎 at your portfolio's risk exposure, scrutinize manager discipline, and prepare for a more challenging credit environment. The best returns will go to those who combine opportunity with caution as the cycle matures.

I'd be interested in hearing your perspective, and I'd appreciate your input. So, please comment below.

#privatecredit #warningsignal #risk #opportunity