Bond prices increased last week and yields declined driven by optimism surrounding the US and Iran ceasefire and subsequent discussions suggesting a commitment to avoid renewed hostilities. US corporate investment grade credit spreads, which measure the additional yield (risk premium) for taking on the credit risk of corporate bond issuers over lower-risk government bonds, also declined 11 basis points to 0.80%, from closing highs of 0.91% the week prior. US economic data came in with mixed results: the Federal Reserve's (Fed) preferred inflation metric, Core PCE, aligned with estimates at 3% (although still above the 2% inflation target). Meanwhile, consumer spending/income and Gross Domestic Product (GDP), a measure of economic activity, came in lower than anticipated. The combined data marginally increased investor odds for a Fed rate cut in December 2026, which is sitting at a 15% market probability. That said, this economic data is largely pre-war and doesn’t fully capture the upswing in oil and gasoline price pressures that have impacted consumers and businesses alike. Lastly, outsized quarterly redemption requests on private credit market funds continued.

The private credit industry has been severely rattled by mounting investor withdrawals and the activation of redemption gates. The rise in retail popularity over the last decade is now presenting some challenges to the industry. Rising redemption requests, which reached 22% for Blue Owl’s $36 billion OCIC fund and 41% for a separate technology-focused fund (OTIC) the week prior, reflect investor nervousness regarding AI-disrupted software exposure, lending practices, and the funds' infrequent liquidity and valuation. Private credit funds, despite paying investors a premium for illiquidity, are often misunderstood due to their restrictive capital lock-up periods and strict redemption guidelines. The response of these semi-liquid fund structures with backlogged quarterly redemption requests far exceeding their caps will be especially telling, potentially forcing these funds to look for ways to pay back investors. Some private funds have set up liquidity sleeve options for redemption events such as this, and depending on the scale of redemptions, may have to look for other means to pay back investors. This week, Carlyle Group’s USD$7 billion Tactical Private Credit Fund capped redemptions at 5%, after investors sought to redeem 15.7% in the first quarter. Carlyle, whose fund has 12% software exposure according to Bloomberg, stressed that capping withdrawals allowed the company to manage liquidity in a disciplined way and prevent forced asset sales at discounts, while strategically retaining capital to take advantage of higher risk premiums available on new loans. 

Third-party rating agency Moody’s also addressed rising private credit market risks, with Global Head of Private Credit, Marc Pinto, characterizing the situation as a stress test rather than a full-blown crisis. Pinto noted that private credit is now held to a higher standard considering its fast-paced growth, concentration risk in software, and regulation challenges. While the structure of these retail private credit funds is seemingly working as intended by allowing fund managers to cap outflows and utilize maturing loans to free up capital, some deterioration in pockets of loan quality is evident, and it may take multiple quarters for these backlogged redemptions to be processed. Furthermore, Fed rate cuts have negatively impacted returns on floating rate loans, the dominant loan type in private credit lending. Consequently, Moody’s cut the credit outlook for Blue Owl to negative following significantly higher first-quarter redemption requests, a factor that may pressure the fund’s strong capital and liquidity positions in the coming quarters.