Private Credit vs. Public Debt (First of a Series)

One of the more discussed charts we’ve run in this newsletter recently compared direct lending yields with that of high-yield bonds. Seems as if many were surprised at the significant spread differential between the two asset classes. For those who missed this chart, we reprise it below as our Chart of the Week.

It made us wonder how many of our readers would benefit from a review of the distinctions between private and public debt, and between middle market loans and their broadly syndicated counterparts. With that in mind, we begin a series exploring the backdrop today for credit investors seeking yield and relative safety.

There are a plethora of factors to consider when comparing different investment strategies. Yield is just one of them. Others include interest rate risk, credit risk, liquidity, volatility relative to market moves, security, and duration risk.

Let’s begin with interest rates. The vast majority of active fund managers have operated in a rate environment that’s been almost entirely bond-friendly. Hard to imagine, but in April 1980 (three months before your correspondent launched his banking career), the prime rate hit 20%. Eighteen months later, 30-year Treasuries reached a high of 14.7%. Today those rates stand at 3.75% and 3.02%, respectively.