With last Thursday’s Fed rate cut, the benchmark is down 200 bps from its peak in 2023. That’s the simple story behind so-called “spread compression” in private credit. While overall yields are down, middle market direct lending spreads are pretty stable. 

What has shrunk are single-B spreads in the broadly syndicated loan (BSL) market. Those sit now at 275-325 bps, down from 400 not long ago. This means the premium illiquid loans are commanding today versus traded loans is higher than it was a year ago. 

What will happen to private credit spreads next year? Unlike liquid loans, whose yields (and therefore prices, which like bond prices move inversely to yields) adjust as cash comes in and out of loan funds, middle market loan spreads change with supply/demand. When there are ample deals flowing in, managers can be fussy. If the perceived risk for the return isn’t attractive, the borrower needs to improve the yield and maybe other terms.