Every fixed income conversation lately turns into a yield comparison. Private credit pays 8 to 10%. Investment-grade bonds pay 4 to 5%. The gap looks enormous until you ask what’s actually being compared.
The real comparison for private credit’s yield is high-yield bonds, not investment-grade debt. Same general credit profile. Same place in the risk spectrum. Line those two up correctly and the yield gap shrinks. What’s left is liquidity, and how each one behaves when rates move. Principal risk is its own conversation, and it doesn’t look the way most investors expect.
Private credit pays a premium over comparable bonds mostly because you give up the ability to sell, not because the underlying credit risk is dramatically worse. You’re buying illiquidity. The rest depends on the manager you pick.
Four questions get into the specifics that actually matter for an allocation decision. How private credit really differs from high-yield bonds. Whether it’s safer than junk debt or just structured to look that way. How each one behaves when rates move. And what you’re actually risking when you write the check.
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Private Credit |
High-Yield Bonds |
|
|
Typical Yield |
8% to 10% |
6% to 8% |
|
Rate Structure |
Floating, reprices with SOFR |
Fixed coupon |
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Price Impact When Rates Rise |
Minimal; income rises instead |
Bond price falls |
|
Borrower Stress When Rates Rise |
Debt service costs rise with the loan |
Coupon stays fixed |
|
Liquidity |
Locked up 5 to 7 years, or gated quarterly redemptions |
Tradable daily on a secondary market |
|
Valuation |
Manager-marked NAV, typically quarterly |
Public market price, daily |
|
Seniority |
Usually senior secured, first lien |
Often unsecured or subordinated |
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Covenants |
Maintenance covenants, tested quarterly |
Mostly covenant-lite |
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Recovery Rate In Default |
60 to 80 cents on the dollar (historical) |
30 to 50 cents on the dollar (historical) |
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Diversification |
Concentrated, fewer underlying borrowers |
Broad, hundreds of issuers in an index |
|
Minimum Investment |
Often $1 million+, accredited or qualified purchaser only |
Accessible via funds and ETFs, low minimums |
What is The Difference Between Private Credit and High-Yield Bonds?
Both lend money to companies that don’t qualify for investment-grade ratings. The differences start with how the loan gets made.
High-yield bonds are public securities. A company issues them through an investment bank, hundreds of bondholders buy slices, and the bonds trade daily on a secondary market with a price you can check in real time. You can sell at 2pm on a Wednesday if you decide you don’t like what you’re holding.
Private credit works through direct negotiation instead. A single lender, or a small club of them, works out a loan directly with the borrower. No public offering, no secondary market. There’s no daily price either, just a quarterly mark the manager puts on the loan. The terms get written for that specific deal, by people who’ve actually underwritten the company’s financials themselves.
That negotiation shows up in the structure. Private credit loans typically carry maintenance covenants: financial tests the borrower has to pass every quarter, win or lose. High-yield bonds mostly dropped these years ago in favor of covenant-lite terms that only trigger if the borrower takes a specific action, like raising more debt. A lender underwriting a private deal can demand real covenants. A bondholder buying into a syndicated deal mostly takes what’s offered.
Seniority differs too. Private credit is usually senior secured, first in line against specific collateral if the borrower defaults. High-yield bonds are frequently unsecured or subordinated, sitting behind bank debt in the capital stack.
The yield gap between the two reflects all of this, not just credit risk. You’re paid for giving up the ability to sell, and for the protections a negotiated deal can demand that a public bond can’t.
Is Private Credit Safer Than Junk Bonds?
In a default, usually. Before a default, that’s a harder question.
Private credit’s structural advantages are real. Senior secured positioning means you’re paid before unsecured creditors and equity holders. Specific collateral backs the loan, not just a promise. Covenants give the lender an early warning system too: a borrower who breaches a covenant has to renegotiate with the lender months before the company would actually run out of cash. High-yield bondholders usually don’t get that warning. They find out when the company misses a coupon payment.
Recovery rates back this up. Senior secured private credit loans have historically recovered 60 to 80 cents on the dollar in default, compared to 30 to 50 cents for unsecured high-yield bonds. If a borrower defaults, private credit lenders typically lose less.
The harder issue is what happens before a default, not after one.
High-yield bonds trade publicly, so the market prices in credit deterioration before anyone declares a default. A bond trading at 70 cents on the dollar is telling you something, days or weeks before the actual event. Private credit doesn’t get that signal. The loan sits on a manager’s books at whatever value they’ve marked it. A manager under pressure has an incentive to amend and extend a troubled loan rather than mark it down, a quiet byproduct of how little independent price discovery exists in a private market.
Private credit is structurally safer if a default happens, less good at warning you one’s coming. The manager you pick determines how much that gap matters.
How Does Private Credit Perform In a Rising Rate Environment?
Better for the lender’s income. Worse for the borrower’s ability to pay it.
Most private credit loans are floating rate, priced as a spread over SOFR. When the Fed raises rates, the coupon on those loans resets higher, usually within 30 to 90 days. Lenders get paid more, almost immediately. A fixed-rate bond does the opposite: a higher rate environment just makes the bond you’re already holding worth less, since new bonds now pay more than the one sitting in your portfolio.
2022 made this obvious. The Fed raised rates from near zero to over 4% in nine months. The Bloomberg Aggregate Bond Index had its worst year on record, down more than 13%. Private credit funds, by contrast, posted rising net investment income as their floating rate loans repriced higher. It looked like exactly the protection investors had been promised.
The borrower side tells a different story. A company that borrowed at SOFR plus 500 basis points when SOFR was near zero was paying 5% interest. The same loan with SOFR above 5% means that company is now paying 10% or more on the same debt, with no change to its actual business. Rising rates that boost a lender’s income squeeze a borrower’s ability to service that debt at the same time. Interest coverage ratios across the private credit market tightened meaningfully through 2022 and 2023, and PIK amendments, where a borrower pays interest with more debt instead of cash, became more common as a result.
High-yield bonds don’t carry this mechanism. A fixed coupon doesn’t reprice, so a borrower’s interest expense stays put even as rates rise around it. That’s a real advantage for credit quality, even as it’s a disadvantage for the bondholder’s price.
Private credit income rises with rates. So does the stress on the borrowers paying it. Whether that net effect helps or hurts an investor depends on what the manager underwrote at origination, specifically how much cushion the borrower had before rates moved in the first place.
What Are The Risks of Investing in Private Credit Funds?
Five things show up across almost every fund, in some combination.
Illiquidity
Most private credit funds lock up capital for five to seven years. Some semi-liquid structures offer quarterly redemptions, but those come with gates, often a cap of 5% of net assets per quarter. If a lot of investors want out at the same time, you may not get your money when you ask for it.
Valuation Risk
The fund’s NAV is set by the manager, not a public market. A loan that’s actually deteriorating can sit on the books near full value for months before the mark catches up, especially if the manager has an incentive to avoid writing it down. You’re trusting the manager’s marks more than you’re trusting an independent price.
Manager Dispersion
There’s no index to hide behind in private credit. The gap between a strong manager and a weak one running the same strategy is enormous, wider than almost any other asset class. Track record and underwriting discipline matter. How a manager behaved in the last real downturn matters more than both, and more than the headline yield they’re advertising.
Leverage
Many private credit funds, especially BDCs, borrow money to boost their own returns, on top of whatever leverage already sits inside the underlying borrowers. That leverage cuts both ways. It boosts returns in a good year and amplifies losses in a bad one, and it’s not always obvious from a fund’s marketing materials how much fund-level leverage is in play.
An Untested Cycle
The private credit market has grown almost 20-fold over the past two decades, to around $1.8 trillion today, mostly during a stretch of historically low defaults. How the asset class behaves through a severe, sustained downturn at its current size is still an open question, because it hasn’t happened yet. Underwriting standards loosened as capital flooded in, and rising PIK income across the market, where borrowers pay interest with more debt instead of cash, is one early sign of stress building beneath still-low reported default rates.
None of these risks are disqualifying on their own. They’re the reason manager selection and position sizing matter more in private credit than they do almost anywhere else in a portfolio.
Where This Leaves You
Private credit and high-yield bonds sit on different points of the same trade-off: market risk against manager risk, the ability to sell against the protections you can negotiate when you can’t.
High-yield bonds give you a number you can trust on any given Tuesday, and a coupon that doesn’t move no matter what the Fed does next. Private credit gives you better odds of getting your money back if a borrower defaults, and income that rises with rates. What it doesn’t give you is much way to verify any of that independently, until the manager tells you what your investment is worth.
Neither of those is automatically the better deal. It depends on what you’re actually optimizing for. An investor who needs to know they can sell next month has no business in private credit, regardless of yield. An investor with a long horizon and real conviction in a specific manager’s underwriting is who private credit’s structure was actually built for.
About the Author
Ben Fraser is the Chief Investment Officer at Aspen Funds, where he brings over a decade of experience in investment management, credit underwriting, and commercial lending. Before joining Aspen, he helped grow institutional AUM from $3B to $7B at Tortoise Capital Advisors and personally underwrote over $125MM in loans across commercial banking. He is also the co-host of the Invest Like a Billionaire podcast, covering economic trends and alternative investing. Ben holds an MBA from Azusa Pacific University and a B.S. in Finance from the University of Kansas, where he graduated magna cum laude.
