While equity market conditions grew relatively placid in the second quarter, interest rates bounced sharply off post-bank failure lows as hawkish Fed rhetoric re-established itself as the dominant driver of sentiment.

The higher cost of capital is weighing on borrowers, and the default rate on broadly syndicated loans is near its long-term average. Rating agencies, meanwhile, continue to downgrade paper at a rapid clip.

Loan supply and demand were both challenged in the quarter. Pronounced volatility and higher interest rates continued to stymie new-loan issuance, while limited M&A activity has disrupted what is usually a reliable pipeline of borrowers. Collateralized loan obligation (CLO) formation ground to a halt, as high loan prices and expensive financing has made investing in these structures less compelling.