Defaults in private credit have been reaching record highs, and fund redemptions have exceeded inflows in some of the sector's riskiest segments. But the troubles in private equity could be just getting started as yields in bond markets around the world climb to the highest level in years, forcing loan refinancings at higher rates. The yield on the 10-year U.S. Treasury note climbed above 4.68% on Tuesday, the highest since January 2025. That day, the rate on the 30-year note surpassed 5.19%, a level not seen since 2007 . US10Y 5D mountain The 10-year Treasury note yield in the past five trading days The yield spike is happening globally alongside the U.S.-Israel war on Iran, which has pushed up energy prices and inflation, spooking investors who want greater returns. Private credit firms make money on interest rate spreads based on Treasury yields, which means they're refinancing their bad loans at a higher cost. Westwood Capital managing partner Dan Alpert said Tuesday he had been "very worried" and that rising interest rates were only making matters worse. "Higher Treasury rates make it harder for companies to refinance, and you've got a jittery market out there worried about inflation," he told CNBC. "Teasing [the macroeconomic factors] apart from what I believe is some significant credit weakness in private credit is very, very difficult." Warning signs from ratings agencies Fitch Ratings' U.S. private credit default rate reached a record of 6.0% for the twelve months ended April 2026, which was up from 5.7% in March. It was the highest rate since the creation of the index in 2024. The ratings agency clocked 10 private credit defaults last month, with seven of those engaging in maturity extensions that were "under stress." Most of those kicked loan maturities out by one or two years from their original date. Another default monitor from ratings agency KBRA declined for the first time in April since 2024, dropping to 3.1% from its 2025 peak of 3.9%. Lenders are increasingly tightening their covenant structures and standards in response to the market's "narrowing margin for error," the agency said in a report last week. Investors are increasingly trying to get their money out of private credit. Redemptions from unlisted business development companies, or BDCs – a recently downgraded segment of the sector – surpassed fundraising in the first quarter, according to data from Robert A. Stanger & Co. That contributed to the Stanger NL BDC Total Return Index posting its first negative quarterly return since 2022. Creditors are feeling pretty low. Earnings call sentiment among private equity's big four firms – Apollo Global Management, Blackstone, The Carlyle Group and KKR & Co – "plummeted to a multiyear low," according to an analysis released Tuesday by ratings agency S & P Global. "The S & P 500 significantly outperformed all Big Four alternative asset managers on a total return basis between January 1 and May 8, 2026, with the index gaining 8.5% while each of the Big Four firms posted negative returns," S & P said. "KKR led the decline with a -19.4% total return." Despite the ailing sentiment and higher default rates, analysts said Tuesday they didn't see a risk to banks and other financial sectors. "Private credit faces higher defaults, but risks are not systemic," strategist Vishwas Patkar at Morgan Stanley told clients. "We expect limited spillovers to the economy/public markets. Private credit 2.0 will likely differ, with a focus on higher-quality underwriting and infrastructure financing for AI as a key driver." Lots of different fund troubles Even as analysts downplay contagion fears, the number of fund closures, amend-and-extend maneuvers, and regulatory probes appears to be increasing. KKR said last week it will inject $150 million into its FSK fund while spending another $150 million to buy out investors who want to leave the fund. A group of banks led by JPMorgan reduced their exposure to the fund days before, CNBC reported. BlackRock TCP knocked its net asset value per share down by 19% in January, prompting a probe from the Department of Justice, as reported last week by the Wall Street Journal . Blackstone Secured Lending Fund's net asset value per share decreased by 2.4% to $26.26 in the first quarter, according to its earnings disclosure . Private equity firm Carlyle Group created a new structured finance vehicle to help repay investors in the company's older private equity funds, Bloomberg reported in March. Blue Owl Capital sought to merge two of its funds last year during a spate of investor withdrawals before abandoning the move . One of its private credit funds issued a $400 million investment-grade bond this week to repay existing debt, according to Bloomberg. Pimco extended a lifeline to Blue Owl last month with another $400 million bond purchase. Access to retirement accounts Private credit firms have been seeking access to 401(k) plans, having received encouragement from the White House in an executive order last year. "The best place for this is in retirement accounts, like in the U.S.," Franklin Templeton CEO Jenny Johnson said last week, stressing low liquidity requirements. Some investors are warning against this expansionary tendency. "The machine has kind of reached its limits with institutional investors. I've seen it written, which is a little bit concerning to me … that we need to go retail to keep making loans … It's almost like you have to always add to your investor base … It sounds like the Social Security system," DoubleLine Capital CEO Jeffrey Gundlach told Bloomberg earlier in May.
