In Brief: V for Volatility: Part II?

At the start of 2025, KKR Credit & Markets identified Credit’s “iPhone moment” as a transformative shift towards integration and simplicity, aiming to unify market complexity through a single interface. Despite optimistic market sentiment, KKR focused on emerging signals such as geopolitical tensions, fiscal deficits, inflationary pressures, and tariffs, which hinted at a more complex environment ahead. As the first quarter progressed, the market’s tone shifted dramatically due to the disruptive impact of tariffs, particularly those on China, affecting consumer goods like Apple’s iPhone. This disruption underscored the vulnerability of even the most iconic systems to policy and pricing power risks. The resulting volatility led to a significant repricing in rates, with the 10-year U.S. Treasury yield experiencing its largest five-day increase since 1982, highlighting the critical role of a stable U.S. Treasury market.

Reflecting on the quarter, KKR noted a sense of déjà vu reminiscent of March 2020, albeit with different catalysts, structures, and responses. Unlike the universal shock of COVID-19, the current volatility is policy-induced, marked by acute mark-to-market swings. However, the structural backdrop is different, with muscle memory and a playbook for navigating such volatility. The focus has shifted from a global shutdown to a recalibration of global risks, requiring thoughtful positioning in the recalibrated risk environment. KKR emphasizes the importance of staying invested, diversified, and intentional, leveraging the strength of a purpose-built platform to navigate evolving markets. Despite the challenges, KKR remains optimistic, ready to adapt and capitalize on opportunities in a regime defined by volatility, underscoring the enduring power of compounding income and the resilience of credit markets relative to public equities.

1. Volatility Has Returned

Volatility has re-emerged as a defining feature of the market environment. Unlike the indiscriminate shocks of five years ago, today’s volatility is more targeted and sector-driven. While investor confidence was initially high, geopolitical tensions, tariffs, and inflationary pressures have shifted the narrative. The market’s response to policy-induced shocks, such as the announcement of tariffs on China, has led to significant repricing across global markets. Importantly, volatility is not uniform but rather sector-specific, reflecting the rolling recession dynamic where pressure moves unevenly through the economy.

Year-to-Date Max Drawdown

The Credit Market Drawdown YTD Has Been More Muted Than Equities, Even for HY CCCs and CLO BBs

2. Carry is the Constant

Carry remains a key stabilizer in uncertain times, reinforcing credit’s resilience relative to public equities. The enduring power of compounding income is a critical anchor in an environment where price action can be volatile and uneven. Despite market volatility, credit markets have shown relative strength, particularly in Europe, where conservative leverage and structural fundamentals provide stability. We think the importance of consistent, stable income in navigating the current market landscape is key for portfolio construction.

Q1 and Year-to-Date Returns Across Global Credit Markets

Credit Has Held Its Ground in a Shifting Landscape, and Why the Ability to Navigate Across Platforms And Structures Matters More Than Ever for Achieving a Truly Diversified Portfolio

3. Dispersion is Rising

Dispersion is on the rise again, with a growing gap between high-quality and lower-rated credits. High-quality BBs are tightening, while CCC-rated credits are drifting wider. This dispersion reflects sector-specific stress and the uneven impact of rolling recessions. M&A volumes are still muted. Fundamental credit selection and nimble portfolio construction are key in achieving a diversified portfolio. The ability to navigate across platforms and structures is crucial for capturing opportunities in a market characterized by rising dispersion. In this environment, compounding in a diversified, risk-adjusted way is not just attractive, it is essential.

Dispersion by Returns and Ratings (Left), Rolling Recessions Have Been in Play for Some Time (Right)

4. Europe Emerges as a Bright Spot

Globally, new-money loan issuance (excluding repricings and refinancings) totaled $230 billion, marking the fastest start to a year since 2021 European leveraged credit has outperformed the U.S. in Q1 2025, showing relative strength during the April sell-off. Europe posted its strongest start to the year since the GFC .We think Europe is as a compelling source of diversified income, driven by conservative leverage and structural fundamentals. The region’s lower share of daily liquidity vehicles reduces the risk of sharp, flow-driven drawdowns. European credit’s underappreciated resilience should continue to offer durable investment opportunities and attract capital toward take-privates, refinancings, and bespoke non-bank solutions.

Long-End Rates Reprice Globally

European Leveraged Credit Outperformed the U.S. in Q1 and during April Sell-Off 

5. Credit as an Operating System

Credit markets have evolved into a more mature and institutional asset class than it was five to seven years ago, due to the expansion of financing options across public and private channels, balance sheet and off-balance sheet, direct and structured. Asset managers have played a key role as traditional banks have retreated. We think this evolution has added a layer of resilience to credit markets, enabling them to act as a critical tool for helping companies transition and adapt through uncertainty. The ability to underwrite and structure across formats is what will drive momentum, particularly in a market where traditional issuance remains well below expectations. That shortfall only underscores the importance of creative origination and integrated connectivity across platforms.

Total Global Financial Assets ($T)

Many of the Most Active Lenders Are Not Banks, But Asset Managers

6. Structure and Sentiment

The market is not merely repricing risk assets – it is also reweighting capital allocation. Volatility has drawn sharper lines around which structures work, where flexibility is valued, and how risk premia are being compensated. Do not be fooled by the headlines: this is not a simple rotation. It is a recalibration and will take some time to play out. The balance of global credit is shifting, across public and private markets, senior and junior, structured and traditional formats, and region by region. In this equation, a day can often feel like a year. Structured alternatives, including early-stage private investment grade, offer enhanced yield, embedded downside protection, and meaningful engagement with issuers. Asset-based finance continues to deliver secured, cash-generating exposure, often with less sensitivity to broad market volatility. These are not fringe strategies; they reflect a shift in how credit is being structured to meet real needs on both sides of the table. We can’t emphasize enough the importance of specialization, discipline, and fundamental underwriting in driving results across the credit spectrum.

Key Investing Themes

• Global Income Diversification: The balance of global credit is shifting, with capital allocation being reweighted across public and private markets, senior and junior, structured and traditional formats, and region by region. There is a newfound importance for diversification as a tool in achieving a resilient portfolio.
• Regional Divergence: As Henry McVey suggested in Tariffs 2.0, fiscal leadership is from the U.S. to Europe and Asia, with fiscal tailwinds abroad emerging as a potential offset to pressure building stateside. This regional divergence is shaping capital flows and expectations, creating a more supportive backdrop for select international credit opportunities.
• Private Structured IG: Private structured investment grade is a strong complement to public markets, offering scale, flexibility, contractual returns, downside protection, and alignment with liability-sensitive mandates. We think that private IG is gaining traction as corporate needs evolve and institutional capital seeks stability.
• Team-Centric Model: The importance of a team-centric model that fosters specialization and cross-functional coordination in deploying capital is increasing. Further, alignments are not just cultural but competitive, enabling team-centric platforms to move quickly between traditional fixed income, capital solutions, private IG, and structured alternatives.

U.S. IG Market is $8.6T Today and the Global Market Stands at ~13T

Corporate IG Issuance Does Not Meet Growing Demand for Financing

Conclusion

The importance of staying invested, diversified, and intentional in a regime defined by volatility cannot be overstated. Credit partners must be equipped to move with purpose and precision, as credit is a critical tool for helping companies’ transition and adapt through uncertainty. We at KKR remain optimistic about navigating evolving markets with adaptability and the strength of a purpose-built platform.