Behind the Yield

Coat On, Keys Out

By Charles Urquhart, CFA · November 1, 2026

I first used the word "uneasy" in March. I used it again in April and then again in September. Last week I was still using it, mostly with people who didn't ask.

So I'm retiring the word. "Uneasy" understates it. I'm now standing by the front door with my coat on and my keys out.

Nobody has set off the smoke alarm. The music is still going and the living room is still full. I have worked in bonds since 1990. Every cycle has taught me to find the door when the lights are still on. Below is what got me up off the couch.

STARTING IN THE BASEMENT

Credit fails from the bottom. Consider a leaky house. The basement will be soaked long before someone in the living room notices that the rug is wet. So I went to the basement first.

In the basement we found CCC bonds. This is where the word "creditworthy" is thrown out with no one in the room believing it. According to Fitch, CCC yields have grown approximately 480 basis points since January. At the end of October the CCC spread stood at 13.45%. Those creditors are not investing. They are haggling.

High yield overall has also emerged from a summer of slumber. The spread has gone from 2.60% at the end of August to 3.38% in late October. That is not a crash. That is the bond market finally reading the guest list.

Global spreads on credit reached their widest in 17 months in the week of October 23.

CoreWeave provided a preview of an AI-induced crisis in a bond form. In mid-October CoreWeave bonds were trading near 15%. The company's stock was down 15.5% in a single day. The CEO claimed that the market was irrational. I've heard that comment from a lot of CEOs over 30-plus years. I have yet to see the bond market send flowers.

Private credit has been promoted as the calm room in the house. Part of that calm is that the temperature is not taken daily. Fitch now has a 6.3% default rate for private credit for the 12 months through September. That is a record. The prior record, 6%, was from April. A record in private credit appears to have a shelf life similar to a carton of milk.

UPSTAIRS

Investment grade lives upstairs. The furniture is nicer, the ratings are higher and the banker remembers your birthday.

Borrowing hasn't decreased at all upstairs. Investment grade firms have issued $1.76 trillion of bonds through the current year. The annual record was $1.75 trillion from 2020. That record was surpassed in October. More than $300 billion of this year's total has been issued for AI.

Microsoft came to borrow at least $25 billion last week. Its last bond transaction was in 2017. The longest bond in that transaction is 40 years. That bond was priced at 1.05 points over Treasuries. Orders for over $115 billion were placed. If lenders are lined up four deep to lend you money until 2066 then you have left something on the table. At least a pony.

I don't have a problem with Microsoft. It is a triple A rated firm with a lot of cash. It's who else is upstairs.

Meta just reported a quarter of negative free cash flow. This is the first time since 2012 that this has occurred. Meta's capex plan for this year is still in the range of $135 billion to $145 billion. One day following the earnings, the insurance on Meta's debt against default reached an all-time high. The equity markets picked up on the promise of AI growth but the bond markets picked up on a smoke detector. After this many years I follow whoever is buying the insurance against a fire.

The one firm that keeps bringing me back is Oracle. In July S&P downgraded Oracle to BBB- which is technically one level above junk. Over the four quarters prior to this downgrade Oracle burned through over $20 billion in cash. Oracle is the second largest non-financial borrower in the Bloomberg corporate index. Approximately $117 billion of Oracle bonds are in this index. In late October Oracle's 2031 bonds were trading 2.63 points over Treasuries. The average BB rated junk bond is tighter than that.

In other words, Oracle is considered investment grade by S&P and junk on all other screens. One of your client's core bond funds likely owns some. They earn an investment grade spread on that fund. In the back of the house is a junk sized risk that has been raiding the fridge.

How are they compensated for that? On October 29 the investment grade spread was 0.89%. That was the widest spread for the year and is still fairly skinny. In October 2023 the same index had a spread of 1.33%. More risk for less compensation is an interesting way of running a bond shop.

THE FED WON'T BE PULLING ANYONE OUT

Each of my prior credit crises had a third act where the Fed made an appearance and cut rates. This time the Fed made an appearance and raised rates.

The raise occurred in September. On October 28 the Fed held rates between 3.75% and 4.00%. Two Fed members dissented and it wasn't because they wanted a rate cut. They wanted another rate increase immediately. Futures currently put about a 75% chance on a rate increase in December. Fitch forecasts a funds rate of 4.25% in December and expects it to remain there through 2027.

The 10 year yield also reached its highest since 2002 in October. During the Middle East flare up Brent topped $112. Mortgage rates are currently near 7.35%.

Healthy firms can handle higher rates. However firms that relied on a cheap refinance cannot. A large amount of those firms are in private credit where most loans are floating. Each increase in rates can be directly applied to their interest rate.

THE CHAIN ON THE DOOR

Non-traded private credit funds were sold to individual investors on two main points: smooth returns and quarterly money back. Returns are still smooth. Money back now comes with a chain on the door.

In the second quarter 27 non-traded BDCs raised $3.3 billion of new money. At the same time $8.1 billion was paid to investors on the way out the door. This was the first time since at least 2022 that more money was paid out than raised.

The 12 largest funds received $19.1 billion in redemption requests and paid out $7.6 billion. Everyone else is in the hallway waiting on the one bathroom, and it only lets in 5% of the line each quarter.

At Blackstone's flagship fund redemption requests are still near 10% of shares. In the third quarter Blue Owl's credit income fund had 16.8% redemptions. Funds can limit redemptions to 5% per quarter and they are doing that. This is all contained in the fund documents. No rules have been broken. This is exactly what I am trying to say.

The part that bothers me is that private credit defaults are at a record. The funds that hold these loans will still report NAVs that barely move. Public bonds are priced every day. Private loans are priced when a valuation committee gets around to it.

IN FAIRNESS

Fitch has seen everything discussed above yet still calls the US credit outlook "broadly benign." Fitch has upgraded their growth forecast for 2026 and 2027 to 2.1%. A recession only appears in Fitch's downside scenario which occurs when AI stocks get crushed.

Proskauer's private credit default index dropped from 2.51% to 2.41% in the third quarter. This was the second straight quarter of a drop in the index. Different lenders, different definitions, different answer.

Demand has not decreased either. Microsoft had no problem filling its order. Through the end of September short and intermediate investment-grade bond funds have taken in approximately $235 billion. Investment grade yields are near 6%. For a buy-and-hold investor the coupon is clipped and it doesn't really matter what happened to the spread the previous Thursday.

I am not calling a crisis. "Broadly benign" is a perfectly acceptable phrase. It is also what the doctor says before scheduling your follow-up in six months.

WHAT I'D DO FROM THE DOORWAY

Standing by the front door does not mean running out of it. It just means knowing where the door is and how many people are ahead of you. If I were a bond advisor this week I would look for the following:

First, the basement. Any client holding CCC bonds, or a fund loaded with CCC bonds, is taking stock risk and earning bond returns.

Second, the core bond fund. Look at how much Oracle, Meta and the other AI borrowers are in the core bond fund. Many clients will be surprised to find that the boring part of their portfolio is quietly making an AI bet.

Third, all private credit funds. Look at how much a client could get out if they need it in 2027 and how quickly. If the answer to that is "pro rata" then that is your answer.

Fourth, either get paid or get shorter. If I am holding investment grade at 0.89% I am holding the short end. That way if spreads blow out I am not stuck with it for 40 years. Otherwise I would hold Treasuries in a ladder at a rate near 5% and let someone else figure out what Oracle is worth.

ONE LAST THING

I spent most of my career within a long bond bull market. Rates fell and prices rose. Each rate cut helped almost every credit problem that occurred. It was a great time for a bond guy. It also caused a whole generation of us, including me, to believe the front door would always be wide open.

That is no longer true. The private credit door has a line down the hallway. The CCC door is stuck. The AI debt door appears to be fine now and I hope that it continues to be. I have also noticed an increase in questions about where it is.

I'm not leaving the party yet. I'm just by the door with my coat on, keeping an eye on who's still dancing in the living room.

If you see me backing out of the driveway, something changed.