12 Jun 2026 Van Hesser's 3 Things in Credit

Nuggets

12 Jun 2026 Van Hesser's 3 Things in Credit - A KBRA Podcast · Nuggets

The Inflation Debate: While inflation is widely regarded by market participants as the single greatest near-term risk to credit markets, structural deflationary forces must be accounted for. [00:01:35] Many fixed-income investors carry lingering psychological baggage from 2022, which witnessed the worst bond market in the 50-year history of the Bloomberg Aggregate Index. [00:01:54]
The Pre-COVID Deflationary Regime (2010–2020): For the decade prior to COVID-19, the dominant economic forces were strongly deflationary. Key secular drivers included: [00:02:08]
- Accelerated globalization.
- Rapid technological advancements (automation, digitization).
- Structural post-Great Financial Crisis (GFC) economic scarring.
- Deteriorating global demographics.
- Cheap energy supplies.
- During this 10-year span, central banks consistently cut interest rates to zero and launched massive quantitative easing (QE) programs just to stoke inflation up to baseline targets. [00:02:35]
The Post-COVID Shock: The massive monetary and fiscal relief rolled out during COVID flipped this regime, driving inflation to a 40-year high. Inflation has now run persistently above target for 5 years. [00:02:42]
Forward-Looking Structural Drivers:
- Globalization vs. Deglobalization: While some supply chains are moving onshore or "friend-shoring" for strategically critical goods (which is inherently inflationary), the vast majority of goods fall outside of this critical bucket. Consequently, manufacturing powerhouses like China continue to exert a net-deflationary pressure globally. [00:03:03]
- Artificial Intelligence (AI): The ongoing arms race to build AI infrastructure (chips, data centers, construction, power demand) is causing a localized, inflationary demand shock in the near term. However, over the intermediate-term, AI will prove to be structurally deflationary due to efficiency gains. [00:03:26]
- Rate Outlook: Supply shocks from the past 5 years (COVID, Russia-Ukraine, tariffs, Iran) are structural outliers that cannot be easily modeled going forward. Barring new shocks, restrictive interest rates are continuing to cool wage growth and the housing market. KBRA projects that the Fed could provide modest rate relief in the back half of 2026, though their calculations indicate it will be no more than one interest rate cut. [00:03:42]

PIMCO’s Thesis: The speaker highlights a recent research piece by asset manager PIMCO titled "Rupture and Resilience." PIMCO argues that after years of effortless returns, the default cycle is actively reasserting itself, predicting "significantly higher losses" in lower-quality credit segments like leveraged finance and private direct lending. [00:04:46] This is fueled by years of loose underwriting, high corporate leverage, floating-rate structures, AI disruption, and rising geopolitical risks. [00:05:13]
Historical Benchmarks: While PIMCO did not explicitly define "significantly higher," historical default losses average roughly 3.5% for high-yield bonds and 3.0% for leveraged loans. [00:05:00]
KBRA’s Counter-Analysis & Financial Metrics: KBRA believes the "rupture" call underweights corporate resilience. To back this up, the speaker points to key credit metrics comparing the Q1 2021 market peak to today: [00:05:35]
- High-Yield Net Debt to EBITDA: Stood at 3.8x in Q1 2021; it remains exactly 3.8x today. [00:06:03]
- High-Yield Interest Coverage Ratio: Was 2.9x in Q1 2021; it has only ticked down slightly to 2.7x today. [00:06:09]
- Single-B Credit Segment Leverage: Was 4.3x in Q1 2021; it sits at 4.4x today. [00:06:21]
- Single-B Interest Coverage Ratio: Was 2.3x in Q1 2021; it has moved to 2.0x today. [00:06:30]
Corporate Adaptation: While riskier segments show marginal weakening, the speaker argues it is not enough to drive alarming loss levels. Corporate America has practiced "constructive pessimism," navigating rolling, industry-specific recessions (e.g., energy in 2014–15, retail in 2018). [00:06:36] Businesses successfully adapted to a higher, more normal cost of capital when interest rates spiked in 2023. [00:07:01]
Macroeconomic Tailwind: According to Bloomberg consensus estimates, real GDP growth is projected to maintain a constructive clip of 2% or higher through 2028, providing a solid buffer against widespread insolvencies despite clear geopolitical tail risks. [00:07:18]

12 Jun 2026 Van Hesser's 3 Things in Credit - A KBRA Podcast

[00:00:06] Introduction: SpaceX Week and Market "Crowding Out"

References

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Robert Kaplan Exclusive | India's Growing Economic Potential Amid Global Challenges

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12 Jun 2026 Van Hesser's 3 Things in Credit - A KBRA Podcast

[00:00:06] Introduction: SpaceX Week and Market "Crowding Out"

References

More nuggets

Robert Kaplan Exclusive | India's Growing Economic Potential Amid Global Challenges

BofA: The Consumer’s Summer Spending Surge | 15 Jul 2026

Must Read Research: SpaceX; The Next AI Winners; Europe’s Earnings Momentum; Buy Value | 14 Jul 2026

[00:01:27] Topic 1: Deflation – A Check on Near-Term Market Risk

[00:04:37] Topic 2: Credit Loss Cycle – Rupture vs. Resilience

[00:07:33] Topic 3: The Triple C (CCC) Signal

Capital Group: 2026 Midyear Outlook | 16 July 2026