Speaker 1:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Jason Daw: Hi everyone, and welcome to this edition of Macro Minutes called “A New Circularity” that focuses on the recent developments in the credit market. And we're recording this episode on March 4th, 2026. And I'm Jason Daw, the head of North America Rate Strategy and the moderator for this episode.
So to lay some background, concerns over the spending and investment circularity of the AI ecosystem between chip makers, hyperscalers and data centers has shifted to a new circularity driving credit spreads wider. The New Circularity, which was initiated by new AI apps hitting software equity valuations and credit spreads, which in turn is feeding into concerns over vehicles that are exposed to that widening, namely the broadly syndicated loan market, the private credit market, BDCs, and even insurance companies.
Now, valuation declines have in turn driven redemption requests at BDCs, which has placed even more pressure on credit spreads. So to unpack what's happening in these areas and what it means for the credit market, we have two RBC experts joining us today, Jason Mandel, who's the Head of Leveraged Finance Desk Strategy, and Steven Denney, who's the Head of US IG Credit Strategy. So let's kick off with the first hot button topic, which is private credit, and over to you, Jason. We've been hearing about private credit for years. Why are we seeing markets move just recently?
Jason Mandel: Yeah, thanks so much. So I think over the last couple of years, the concern really has been in private credit about what the marks are for investments on the books, as well as some of the work that private credit has done to work with their borrowers to avoid defaults. So amend and pretends the greater use of pick payments to avoid the sort of cash weight of cash interest on the borrowers. But now what we're seeing is in the last couple of months, there's been a circularity of concern, which was largely around the AI spending and investment loop. So think about chip makers, hyperscalers, and data centers all sort of investing in each other and buying from each other.
This new circularity that we've seen really in the last handful of weeks, it's really feeding through now into the loan market. So we've seen a selloff in software driven largely by what we've seen with the recent developments and strength of the AI models, which can replace apparently a lot of the software business models and companies. That's what the concern is. So we've seen a selloff now also in other AI disintermediation exposed sectors such as insurance brokers, wealth management, legal services, other sort of AI apps that have come out that potentially could replace some of those business models. These selloffs across these spaces and concerns over an uptick in defaults are impacting CLOs directly and driving concerns about private credit valuations. We're seeing that play out in the aggressive BDC equity selloff as well. The further circle of concern is white collar job losses, impacting unemployment in higher paying industries, feeding through into real estate values, and ultimately into insurance companies as well with more holdings of CLOs and private credit. And that's the sort of circularity that's been the most recent concern.
Jason Daw:
Okay. Thanks for those insights. So Steven, pivoting over to IG, what are the recent moves tied to private credit fears?
Steven Denny:
Sure, Jason. And thanks for having me on. I'd say similar to what's happening in LevFin and IG, anything that's been remotely tied to private credit has been under pressure over the past few weeks. Mid-to-Low Triple-B BDCs on redemption requests and gating headlines. For example, just this week, there was a headline that 8% had been pulled from a particular fund. And just this morning, there was a headline that senior execs had helped put some more cash into it. And so the ticker was wider just on the back of that to dividend cuts, to assets being sold below book value, and obviously those BDCs that are exposed to software sector, which is most. So there's still sustained skepticism about BDCs. And so that kind of parallels also with what we're seeing in asset manager equities, which have faced similar pressure. Credit spreads have widened for those names as well.
And then also within IG life insurance credit even. So there's a handful of those names that have been anywhere from 25 to 50 basis points wider over the past week on that similar narrative that Jason just mentioned on higher private credit exposures. And that has also fed through into insurance brokers on potential AI disintermediation. The more challenging liquidity conditions and thinner markets are probably exacerbating those moves just a bit. What's almost more interesting is these same insurance brokers and life insurance names caught a bid on Monday on both fast money and real money flows, even amidst the volatile Middle East backdrop, given the degree of underperformance recently and just today, those names are quite bit as well. This morning, the IG calendar started back up. Even the names that I just described on the underperformance, a lot of those names are snapping back. So I'd say bottom line across these financial sub-sectors, we're certainly seeing credit dispersion as of late.
Jason Daw:
Okay. And staying with you, Steven, away from the private credit kind of area, what are IG investors the most worried about right now?
Steven Denny:
Yeah, so I'd say it's significantly higher technology sector debt issuance or supply from the hyperscalers was and still is the biggest concern amongst IG credit investors in 2026. Outside of Oracle, which continues to be a big focus for IG investors given ratings and the degree of free cashflow burn, I'd say the balance sheets for the high quality hyperscalers like Meta, Alphabet, et cetera, can easily absorb the pace of supply.
Based on incredibly high CapEx needs, everybody knows they need to tap debt markets to fund. So it's really more about how much capacity can the IG market absorb at any particular moment in time. Our investors are selling existing exposures to make room for any deal. I'd say away from hyperscalers, there are some related sectors that are facing associated credit metric pressure and corresponding higher debt supply, namely the utility sector. I'd say supply for the utility sector is set to increase double digits with five-year medium-term CapEx plans continuing to increase at Q4 release just the past few weeks, all coming to fund all this generation capacity and associated T&D grid build out, both at the holding company and operating company levels.
Specifically, my supply expectations have continued to rise for the sector and now I'm thinking somewhere in the mid 150 billions with some caveats there depending on what companies do in terms of flexibility. So Department of Energy just announced a big loan program, bonds issuing other currencies, et cetera. So that could take that number down a little bit, but by and large, a huge amount of supply coming from the utility sector. I'd say away from that in media, now that Netflix has dropped out of the very public bidding war for Warner Brothers, credit investors are trying to figure out the various scenarios, implications for the WBD and PSKY capital structure, given the complexity of the deal and the very large debt financing component of the higher bid. I'd say outside of the AI and TMT sectors, I'd say within broader pharma healthcare has been extremely resilient through this most recent ballot of volatility.
I'd say, but the Bayer situation in particular has been topical amongst investors as the Supreme Court Roundup case is approaching in late April, and the company has proactively proposed a $10 billion settlement, which must be approved by a Missouri judge. The credit story for this pharma cum crossover name appears binary for now is the company's ability to stem stifling litigation rest on these upcoming catalysts. And I'd say lastly, the weakness in the IG chemical sector has continued to be very topical. Rating agencies taking more negative rating action in Dow and Lyondell recently, given the sustained high credit metrics and as well as in-market weakness. There is some medium-term potential for some of these larger capital structures to become the latest sector fallen angels, but as of late, because the sector has underperformed so much, it's actually trading okay and not commensurate with the beta that we have seen over the last few weeks.
Jason Daw:
Okay. So one of the narratives in the market has been how AI could impair certain business models. And Jason, over to you, there's a counter argument many management teams make saying that their companies are going to benefit from AI as they adopt and become more efficient. Should that alleviate some of the concerns?
Jason Mandel:
Well, I think a lot of those management teams are right. There will be substantial efficiency benefits and we're even seeing them here at RBC and there will be some first mover advantage to be had. But the concern is that in any given industry that can benefit, it will ultimately become a necessity to adopt AI if it's not already. So these adoptions will ultimately allow for some workforce reductions, administrative cost reductions, and obviously efficiency gains. The problem is that your competitors can and will ultimately do the same thing. So for a period of time, there will be some winners who will be able to essentially out compete their peers, potentially marginally reduce price, but still expand their margin because their costs are coming down so much. The issue comes over time when ultimately the ability to earn these free rents is going to go away because your competitors are going to be doing the same thing and be able to kind of meet you at your price cuts or service improvements.
And therefore you may be in a situation where in some of these industries, it's a little bit of a race to the bottom where you're able to cut price, expand margins, and then your competitors are doing the same thing and you end up on a lower overall base.
Jason Daw:
Okay. And sticking with you, Jason, so there seems to be some large rotations going on out of asset-light into asset-heavy. What are you seeing and how sustainable is this?
Jason Mandel:
Yeah, we definitely have seen that. And I think that's a true across credit and equities. And even if you look at S&Ps, we're more or less kind of sideways over the last couple of months, despite all this headline and volatility. But what we've certainly seen is a massive amount of rotation take place between sectors. So certainly in credit, as we've seen in equities, we've seen software get hit pretty meaningfully. We've seen financial service intermediaries like insurance brokers get ahead, professional services like wealth management and legal services. And we've seen buying in some of the asset heavy sectors, some of the old world sectors, if you will. A&D, energy, obviously both of those also help by what's going on in Iran, industrials, chemicals. The challenge is that for some of these sectors, and you might point out chemicals is one of them, for example, the fundamentals are really not necessarily any better.
You've got kind of higher input prices and inflationary situation and still a fairly challenged end market situation and oversupply. So while we've had buyers of securities of bonds and of loans, it doesn't necessarily mean that there is a view that the chemical sector is actually in a better fundamental position.
Jason Daw:
Okay. Thanks a lot for that, Jason. Steven, pivoting to the developments in the Middle East, what are IG investors saying?
Steven Denny:
Yeah, I'd say it literally changes by the hour, but to be honest, I've been surprised at the muted response across IG credit. I'd say the market has been so trained recently to buy the dip during recent geopolitical developments. And we saw it happen during the 12-day war last summer. It gradually happened during the Russia-Ukraine war, even though we had a pretty big energy shock. And frankly, that appears to be what's playing out this time, at least for the initial stages of the conflict. I'd say the broader IG market opened wider on Monday, only to get aggressively bought throughout the afternoon. And we saw some fairly similar price action yesterday, even with equities down 2%. That was quickly faded, and the days one overnight bank deal traded pretty better from pricing. I think those type of constructive moves really speak to the strong technicals in positioning more than anything across credit.
As for specific sectors, obviously energy has been a big beneficiary of this. Obviously, as long as assets aren't actually impacted by strikes and trade lanes and being interrupted, I'd say generically across the IG energy sectors, we're anywhere from two to five basis points tighter through yesterday's close. And again, today, the market is quite bid, so we are much tighter than that versus yesterday's levels. I'd say generically, shorts feel like they rarely work in times like this and tend to be quite crowded, exacerbating moves in other directions when the sentiment turns. So we're basically, we're kind of right back to where we were at the end of last week, but with each successive day that goes on, the threat of real sustained contagion across the Middle East increases threatening energy and trade supply chain. So we're already starting to see constraints happening in the region, even without real infrastructure damage.
So the narrative is starting to build about potential inflationary impacts if the conflict continues and there aren't mitigating actions against it. So I'd say net net IG market participants don't really appear concerned this conflict could have broader impacts, which could prove correct. I'd say, but overall that could be shortsighted. The only time will tell.
Jason Daw:
Okay. Thank you very much. Similar question, Jason. The market response appears to have been somewhat muted on average so far given the Middle East developments. What are the high yield investor communities saying?
Jason Mandel:
Yeah, we've definitely been backing up to some degree, but not in any dramatic fashion. I mean, for high yield, we're still in this, call it 250 to 300 spread band that we've really been in since last summer. We are at the wide end of it now, but still generally speaking in that band. Underneath the surface, we've definitely seen some pretty big sector rotation, as I just mentioned a moment ago. And on top of that though, we've also seen some pretty meaningful quality decompression where we've seen the single B versus double B spreads in high yield move out to about 150 basis points, which is sort of now approaching the Liberation Day wides. In loans, it's beyond that. At loans, we're near a 250 basis point spread, which is wide to Liberation Day wides. And definitely some of that reason is the bigger exposure to software and to some other sectors that have been more impacted.
So on average, the moves are not massive. With the recent events in the Middle East, we've seen more volatility, big individual day moves of risk on and risk off, but drilling down, really it's the sector moves and the quality moves that have been much more significant than the overall average move of the market.
Jason Daw:
Thank you to our listeners for joining this episode of Macro Minutes. The cross currents and complexities of private credit and the AI theme will be important for the IG and high yield space and equities for an extended period. So please reach out to us directly or via your RBC sales representative for additional follow-ups.
Speaker 4:
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