Alternatives

A Case for Continued Caution in Credit

Following a strong 2025 for credit markets broadly, mounting headwinds in early 2026 prompted a sharp increase in volatility and a repricing of risk. Conditions during the first quarter were reminiscent of second quarter 2025, with concerns about the potential disruption of artificial intelligence (AI) and the war with Iran replacing tariffs as the primary headwinds and sources of uncertainty.

While spending and earnings growth appear to be resilient in the face of ongoing economic uncertainty and spiking energy prices—perhaps due in part to outsized tax refunds paid out this year1—we remain wary of the K-shaped economy in which activity increasingly becomes dependent upon upper-income households, as well as tech-oriented businesses. In corporates, we see meaningful bifurcation between higher and lower quality names and a similar story in the consumer segment where strain exists amongst the lower-income consumers, such as the growing use of credit cards to cover essential expenses and troublingly high auto loan and lease delinquency rates.2, 3

 

We continue to see signs of strain among lower-income consumers and lower-quality credits.

We believe caution remains appropriate. By prompting what appears to be the largest-ever physical supply disruption to world oil markets, the war with Iran has sent a stagflationary impulse to the global economy that, the longer it persists, is likely to weigh on economic growth while adding to inflationary pressures facing consumers. And while spreads in many credit assets are wider than where they began the year, spread compensation remains compressed on a historical basis, particularly for the good-quality credits we seek in today’s highly uncertain environment.4

1 Source: Internal Revenue Service; data as of April 17, 2026.
2 Federal Reserve; data as of April 7, 2026. 
3 Source: Morgan Stanley Research; data as of January 7, 2026 (most recent available).
4 Source: Federal Reserve Bank of St. Louis; data as of May 4, 2026.

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This material is for informational purposes only and reflects prevailing conditions and the judgment of the author(s) as of the date of publication, all of which are subject to change. This material should not be relied upon as investment advice; it does not constitute a recommendation to buy or sell a security or other investment; and it is not intended to predict or depict the performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or consider the specific objectives or circumstances of any investor. We consider the information in this material to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment.

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All investments involve the risk of loss of principal.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Alternative Investment Risks

Alternative investments can be speculative and are not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing and able to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks include:

  • Loss of all or a substantial portion of the investment;
  • Lack of liquidity in that there may be no secondary market or interest in the strategy and none is expected to develop;
  • Volatility of returns;
  • Interest rate risk;
  • Restrictions on transferring interests in a private investment strategy;
  • Potential lack of diversification and resulting higher risk due to concentration within one or more sectors, industries, countries or regions;
  • Absence of information regarding valuations and pricing;
  • Complex tax structures and delays in tax reporting;
  • Less regulation and higher fees than mutual funds;
  • Use of leverage, which magnifies the potential for gain or loss on amounts invested and is generally considered a speculative investment technique and increases the risks associated with investing in the strategy;
  • Carried interest, which may cause the strategy to make more speculative, higher risk investments than would be the case in absence of such arrangements; and
  • Below investment grade loans, which may default and adversely affect returns.

A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of credit worthiness of an issuer with respect to debt obligations, including specific securities, money market instruments, or other bonds. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. Not Rated (NR) indicates that the debtor was not rated and should not be interpreted as indicating low quality.

Deal quality refers to an assessment of the degree to which a loan’s characteristics—including covenant structures, use of proceeds, amount of leverage and the attachment point within the capital structure—benefits lenders.

The information presented does not reflect the performance of any fund, strategy or account managed or serviced by First Eagle, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this material will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.

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