Moody’s Analytics latest data story reveals that the credit risk is fragmented and fragile across public and private markets, and where stress may surface next.
Calm on the surface, but a more fragmented market
US corporate credit appears to be stabilizing. Default rates are edging lower; credit spreads remain near multidecade tights, and economic growth has proven resilient despite geopolitical and policy uncertainty. But forward-looking risk indicators tell a more complex story, one where credit risk is not disappearing is in range-bound, and increasingly fragmenting beneath improving headline averages.
This fragmentation is visible across company size, sector exposure, access to capital, AI disruption exposure, and, notably, the divide between public and private credit markets.
Default rates are falling, but from elevated ground
As of March 2026, the average one year expected probability of default (PD) for all US listed companies stood at 7.9%, down from 9.1% a year earlier, but still elevated by historical standards. For US high yield companies, PDs declined to 3.2%, reflecting gradual improvement but remaining within the same sideways range that has defined the market since 2023.
These improving averages, however, mask dispersion. High yield issuers are larger, more diversified, and less vulnerable to near-term refinancing pressure than the broader universe of public companies. Smaller, unrated firms, many of which resemble private credit borrowers more closely, continue to exhibit higher and more persistent risk.
Private credit sits at the center of the dispersion story
A growing narrative suggests private credit is uniquely vulnerable while public markets remain resilient. The data supports some elements of this concern, but not in simple, binary terms.
Moody’s analysis suggests that the private credit default rate in 2025 likely ranged between 1.6% and 4.7%, depending on whether distressed exchanges are included. Distressed restructurings accounted for approximately 65% of all defaults in 2025, materially influencing how default risk is measured across private markets.
Excluding distressed exchanges lowers the measured default rate, but risks understating latent stress. Including them captures a fuller picture of credit deterioration but may overstate realized loss of severity, resulting in a wider band of uncertainty than investors typically face in public credit markets.
Private credit’s divergence as default dynamics shift
Private credit has continued to expand rapidly, with corporate lending assets under management expected to exceed $2 trillion in 2026 and grow toward $4 trillion by the end of the decade. That growth has been accompanied by evolving structures that can obscure underlying leverage, including covenant lite documentation, payment in kind (PIK) income, NAV-based lending, and layered fund level leverage.
The opacity of the asset class makes it difficult to estimate a market-wide measure of credit risk. However, the default rate in private credit direct lending space can be estimated if distressed exchanges (or “soft credit events”) are excluded. The approximated default rate for private credit in 2025 was likely in the range of, roughly, 1.6% to 4.7%.
Publicly traded business development companies (BDCs) offer one of the few transparent windows into private credit risk. As of March 2026, average PD-implied risk for public BDCs exceeded that of Baa-rated public corporates by the widest margin since post-pandemic normalization, while PIK income as a share of investment income continued to rise.
Higher-for-longer rates raise the stakes for private markets
Interest rates remain central to the outlook. Markets have sharply reduced expectations for Federal Reserve rate cuts in 2026, reinforcing a higher-for-longer environment that disproportionately affects floating rate borrowers and near-term refinancers, profiles that are more common in private credit portfolios.
While average credit risk indicators point to easing defaults through mid-2026, Moody’s baseline economic forecast places GDP growth at roughly 1.5%, just above the historical “stall speed” below which defaults tend to accelerate. With such a narrow margin of safety, even a modest growth disappointment or confidence shock could cause stress to surface quickly, particularly in less liquid pockets of the credit market.
What should investors focus on now?
For credit professionals, the environment calls for selectivity over simplicity. Falling default rates should not be mistaken for a broad reduction in risk. Instead, today’s market rewards issuer level analysis, sector awareness, and a clear understanding of how quickly a fragile equilibrium can tip. View the data story for more in-depth analysis.