2026 credit market outlook: This side of paradise

Recent developments in funding liquidity may signal a turning point in the credit cycle. While systemic risks appear limited, shifts in capital flows, sector-specific pressures, and evolving lender dynamics are reshaping opportunity sets across private credit markets.

In this paper, Jason Thomas and Mark Jenkins examine how a reversal in fund flows, driven by a technological rather than macroeconomic shock, is influencing credit conditions, valuations, and considerations for portfolio construction.

Key Takeaways

• A turn in the credit cycle, not a systemic crisis
  Private credit markets remain structurally distinct from pre-2008 banking systems, with lower leverage and longer-duration liabilities. However, tighter funding conditions may still drive changes in spreads, defaults, and refinancing activity.
• Funding liquidity is becoming a key driver of credit conditions
  A reversal in fund flows could reduce competition and deployment pressures in ways that meaningfully improve the investment opportunity set (wider spreads, better terms, etc.) but complicate refinancings for weaker credits.
• Technology concerns are influencing market sentiment
  Markets have taken a “sell first, ask questions later” approach to the technology market, which has contributed to spread widening and increased distress, despite relatively stable underlying fundamentals to date.
• Refinancing risk is rising for select borrowers
  Companies with near-term maturities, particularly in the software sector, may face more challenging refinancing conditions if liquidity remains constrained.
• Diversification remains critical
  Recent developments highlight the limitations of narrow sector concentration and underscore the importance of diversification across industries, geographies, and market segments.

Read the full report for a detailed assessment of credit market dynamics, including implications for portfolio construction and capital deployment in the current environment.