Is Now a Good Time to Issue Private Debt?

In early August, investors were spooked by a jump in the US unemployment rate, which had risen to 4.3% in July. This is the highest level in three years and sparked a widespread sell-off. Concerns, however, that this increase signals the start of a more severe economic downturn are likely exaggerated. The US economy has remained resilient, consistently outperforming the expectations of most market participants. While the rise in unemployment warrants close attention, it was an expected development and doesn't alter the broader economic narrative. Indicators such as job vacancies, quit rates, and wage growth have all suggested a softening labour market, making this uptick in unemployment unsurprising in the context of existing trends.

The recent unemployment figures have increased the likelihood that the Federal Reserve will act at its upcoming meeting next week. Fed Chair Jay Powell stated, “The time has come for policy to adjust,” and highlighted growing “downside risks” to the labour market. With the ECB and the BoE already cutting, and the Fed likely to follow suit, it’s no surprise that bonds are rallying. The rally in duration has driven underlying yields lower, and with central banks aiming to support economic growth amidst a weakening labour market, we expect interest rates to stay low for the foreseeable future.

In a similar vein to the ‘surprise’ weakness in US jobs data, credit spreads, not so surprisingly, also spiked last month. Given how tight credit has been trading, any sign of weakness was bound to push spreads higher. While spreads have settled around previous levels, the broader rally in duration is likely to lead to lower overall funding costs. Strong growth in private debt markets, combined with reasonable deal carry, makes this asset class an appealing option for investors, likely driving continued strong demand.