By Karishma Vanjani

A series of bankruptcies, bad loans, and allegations of fraud by borrowers this month have spooked investors in private credit, a murky, multi-trillion dollar industry where private companies borrow directly from wealthy investors and regional banks, which also lend to private companies. JPMorgan Chase CEO Jamie Dimon warned last week that more credit risks or "cockroaches' could be lurking in the economy.

Yet the high-yield bond market, home to junk bonds rated below investment grade, has been surprisingly resilient. The SPDR Bloomberg High Yield Bond ETF -- ticker symbol JNK -- is down less than 1% in the past month. In contrast, the SPDR S&P Regional Banking ETF is down 6%, most of that following news of charge-offs due to bad loans at Zions Bancorporation and Western Alliance Bancorporation.

Spreads, or the yield junk bonds earn over a risk-free Treasury temporarily widened by less than half a percentage point after news of the bankruptcies and bad loans, but then quickly shrunk. Junk bonds currently offer about 3% extra yield over safe government debt. This yield spread is close to the historic low set in 1998. It's evidence of the composure of high-yield investors despite headwinds.

"It's been a weird last few months," says Hunter Hayes, a portfolio manager at Intrepid Capital, a $1.5 billion fixed-income shop. "There's a lot to be nervous about and there's a lot not to like." Yet credit securities remained priced for perfection, he says.

More 'cockroaches.' Additional signs of cracks in the credit market continue to emerge. On Wednesday, subprime auto lender PrimaLend Capital Partners declared bankruptcy, joining First Brands and Tricolor, also tied to the auto industry.

Some strategists worry investors could be dangerously underpricing the potential for more blowups. The debacles "may have repercussions on the financial system more broadly," warns junk bond guru Marty Fridson, chief executive officer of FridsonVision High Yield Strategy.

But the direct impact of individual bankruptcies is limited because credit markets are so large and diverse, he says. Automotive and Consumer Goods sectors make up just 3.1% and 3.7% of the overall high-yield market value, respectively, according to index data from ICE. The financial services sector, more closely tied to Tricolor, a subprime auto lender, makes up a heftier 8%.

"Not all of the issuers in those industries will necessarily be exposed to problems that have come to light with First Brands and Tricolor," says Fridson.

Better junk. Another reason for investors' apparent equanimity: The junk bond market is generally higher quality now than it used to be. For example, highly speculative triple-C-rated corporate debt has shrunk to just about 12% of the market versus 18% in 2007, according to CreditSights.

Investors, awash in capital, also have tons of money to keep taking risks. The money supply grew by a record 27% in early 2021 from a year earlier as the Federal Reserve and Congress injected cash to revive the economy during the Covid-19 pandemic. "While global central banks did tighten policy quite significantly and very quickly, it only went so far, " says Winifred Cisar, global head of strategy at CreditSights, explaining the growth.

This year through mid-October, high-yield ETFs saw a net inflow of $16.4 billion, almost double the amount from the same period last year. And as the Fed keeps cutting interest rates, there will likely be an even stronger bid for junk bonds from investors seeking higher yields than cash can offer. "Money managers have to buy bonds," says Cisar. "They can only sit on cash balances for so long."

Next up. Where are the pressure points? One place to look is at companies operating in areas with lower income consumers. Inflation, a tough job market, and higher borrowing costs have made it harder for them to pay back their debt.

"I'm not saying we're going to 2008-2009 again [but] I expect spreads to widen, defaults to move up" and more restructurings in high yield and the loan market as companies bear the weight of tariffs and higher borrowing costs, said Jim Schaeffer, leveraged finance chief at Aegon Asset Management, which manages $380 billion. The firm-managed funds had limited exposure to First Brands through loans, according to a person familiar with the matter.

Noah Wise, senior bond portfolio manager at Allspring puts it more bluntly. "You're simply not getting compensated adequately for those risks," he says.

What will get the high-yield market to care more about credit cracks? "Simply be more pressure points in leveraged loans and private credit," says Steve Caprio, Deutsche Bank's credit strategy chief. "I think we're on our way to getting there."

It may just be a question of how long the journey takes.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com

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October 23, 2025 03:00 ET (07:00 GMT)

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