Prior to the conflict in the Middle East, the U.S. financial markets were being confronted with headlines and attendant concerns surrounding the credit markets. Indeed, while the primary focus was on the potential for challenges from the private credit arena, the public credit markets did not escape this increased scrutiny either. Against this backdrop, it is a fair question to ask: where do things stand now and for the months ahead?

Obviously, the storyline involving the Middle East conflict is still taking center stage and could more than likely continue to impact markets in the weeks ahead. However, barring any adverse developments, one could make the case that the market focus could very well shift back to a pre-conflict setting.

There have been varying papers written about how AI could or could not impact certain industries in either a positive or negative way. We are not going to opine either way on this but instead provide some thoughts on the prospects for the U.S. credit markets.

Within private credit, business development companies (BDCs) are a primary component. For those not familiar, BDCs are closed-end investment funds that invest in the debt and equity of small and medium-sized private companies that may not be able to obtain financing from the public credit markets. They often use a floating-rate loan structure and can be traded on major stock exchanges but can also be non-listed.

In terms of private credit, arguably the primary concern has revolved around the impact that AI could have on the software industry and the fact that BDCs tend to have visible exposure to this sector. In addition, within the BDC sphere there have been negative headlines surrounding allegedly fraudulent behavior, as well as redemption pressures. Up to this point, default rates have remained within historical norms, but the anxiety level has certainly risen.

That brings us to the more well-known public credit arena, namely U.S. investment grade (IG) and high yield (HY) corporate bonds. The natural question has been, and may continue to be, whether any of these negative private credit developments have begun to creep into the IG and/or HY markets.

The first place to look for any signs of ‘contagion’ would be their respective spread levels. Without a doubt, IG and HY spreads had been residing at the lower end of their historical ranges to begin 2026. While some have opined this renders U.S. corporates as being on the ‘rich’ side of the spectrum, history has shown, that given the ‘right’ type of fundamentals, spreads can stay at those narrower levels as investors continue to pick up what is known as ‘carry and yield.’

That being said, spreads at the low end of historical norms can also be susceptible to re-widening if a development or event that can be considered challenging rears up. That is exactly what investors saw transpire prior to the Middle East conflict. To provide perspective, IG spreads widened by 13bp from their January low, while for HY, the differential increased by a little more than 40bp from its early year nadir.

It should be noted that these types of spread movements are considered to be more measured in nature, and not indicative of a systemic credit level of anxiety. In fact, since the Middle East conflict began, both IG and HY spreads have actually contracted a bit from these near-term highs. The bottom line is that credit-related headlines will probably remain a part of the fixed income investment landscape in the weeks and months ahead, so volatility could very well remain elevated as well.