The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Sebastian Pellejero

NEW YORK, May 14 (Reuters Breakingviews) - It’s another glum season for bankers hawking loans. April saw $7.5 billion trickle from traditional lending to highly levered borrowers, the weakest month since 2009, according to Bank of America. Some $9 billion of high-yield bond sales badly trails the past decade’s average. Banks’ rising rivals in the $1.5 trillion private lending market, meanwhile, have an imposing capital hoard to advance.

Wall Street’s former stronghold of underwriting loans and then selling them to investors is eroding. Serving private equity was once practically a subscription business, seeing Blackstone or Apollo Global Management returning to JPMorgan or Citigroup repeatedly to raise funds for deals. Now, President Donald Trump’s chaotic tariff war has curtailed borrowers’ appetite, with buyouts running at a fraction of their pre-Covid pace. What remains is largely going to the lending operations spun up inside private asset managers.

Some 89% of credit investors surveyed by BofA expect tariff-related volatility to persist or worsen. How recently reduced hostilities between the U.S. and China will affect the mood is unclear. Cruise operator Carnival and storage provider Seagate Technology both priced bond issues on Monday. Febrile pricing betrays anxiety, though. The pay-off above safe U.S. government debt demanded by buyers of high-yield bonds has swung around from 2.7 percentage points in February to as high as 4.6, before settling down in the middle.

The defining difference between loans from Wells Fargo and asset managers like KKR is that banks are cheaper, but so-called direct lenders are more certain: there is no lining up a field of investors, just a promise to hand over locked-up funds. When pricing is gyrating wildly, banks must hedge their terms more. Their cost advantage has narrowed, too, to less than a percentage point for borrowers with a middling double-B credit score, says BofA.

Bulging coffers at direct lenders increase their competitiveness since they must deploy their riches, having raised $86 billion in North America in 2024, according to Goldman Sachs. The average fund now commands over $2 billion in assets, doubling 2023’s figure.

Granted, this is not quite 2022’s perfect storm of inflation, rising rates and recession fears, when banks were stuck with loans they couldn’t sell on. Back then, direct lenders captured a quarter of all issuance, BofA reckons. Today, it’s more like 15%.

Banks are at least getting a piece of the action by lending to their rivals. Loans to non-depository financial institutions have exploded to $1.3 trillion, more than double 2019’s level, says Goldman Sachs. Firms like JPMorgan have seeded their own direct lending units. It’s just meager recompense for bankers left sitting on their hands.

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CONTEXT NEWS

Syndicated loans and high-yield bonds registered a combined $16.5 billion in primary issuance volume in April, well below historical averages. On May 12, the same day that trade negotiators agreed to reduce tariffs between the U.S. and China, cruise ship operator Carnival, data storage company Seagate, and packaging products firm Crown Americas all closed on new bonds to pay back outstanding debt.

(Editing by Jonathan Guilford and Maya Nandhini)

((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))