A Crisis of Confidence

Alack of confidence has altered the Credit landscape since the U.S. Federal Reserve began aggressively raising interest rates on the back of rising inflation. More than a year into the confidence crisis, we think it is important to take a closer look at the market’s fault lines, where the lack of confidence is showing up as indecision, a reluctance to act, a lack of consensus, or some combination of those factors.

The first quarter of 2023 brought some signs of tepid confidence, with an increasing pipeline of M&A processes and leveraged buyouts, but a series of bank runs sent a different message. We have discussed in previous letters how a lack of confidence and leadership has frozen capital markets, and in this letter, we trace the confidence trail through interest rates, the banking system, and financial markets.

We also explore how confidence has contributed to a structural shift away from leveraged loans and into high yield and private credit. Finally, we discuss what confidence can look like and what opportunities it can bring.

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