With credit spreads near multi-year tights and seemingly resilient against recent wobbles within equity markets, the backdrop appears vulnerable to signs of economic weakness, especially amid ongoing geopolitical tensions and the US government shutdown, which could trigger a snapback in spreads.
We continue to expect widening to be contained against expectations of slower growth (no recession), lower rates and still low corporate defaults. As an example, Asia dollar credit spreads widened in October (as of Oct 31), albeit mildly, amid the prolonged US government shutdown, ongoing trade tensions and jitters in credit markets stemming from several risky borrowers in the US. Spreads, however, tightened towards month-end as trade tensions eased ahead of upcoming trade talks, supported by a soft September CPI, a 25 bps rate cut and investors that began viewing the private credit stresses as idiosyncratic with minimal spillover to the banking sector.
Fundamentals may also add to technical drivers for spread movements in the short to medium term. While credit investors continue to keep an eye on technical developments and rate expectations, rating agencies continue to keep an eye on credit market fundamentals.
Expectations remain for credit fundamentals across various sectors, including sovereign, corporates and financial institutions, to stay broadly stable with a strong 1HFY2025 performance on front-loading of demand and resilient domestic economies. However, there appears to be some caution ahead of 2026 with global economic growth potentially sluggish due to adjustments to tariffs and policy shifts, while China could face external and domestic challenges from a persisting property malaise. Other Asia Pacific economies may also see a structural decline in foreign investment that undermines long-term growth as higher tariffs impact the attractiveness of some economies and pose potentially longer-term credit risks with varying capacity for fiscal support.
See also: What the conventional economic wisdom is missing
Some economies, such as China and Japan, may see reduced household spending due to either continued economic uncertainty or rising living costs. These fundamental considerations, along with the tight technical environment, may possibly drive sharp movements in investor sentiments and confidence levels and drive a significant correction in asset prices across multiple asset classes. This highlights a vulnerability of markets to rising tail risks.
A close call
A good example of tail risks was the alarm that was caused by the Chapter 11 bankruptcy filing at the end of September of First Brands Group (FBG). FBG is a privately owned US auto parts manufacturing group founded in 2013 that grew quickly using aggressive debt-funded acquisitions, using private credit.
See also: ECB’s Sleijpen warns eurobonds ‘only lead to higher debt’
Aside from traditional direct lending and term loans, FBG also engaged in off-balance sheet financing, factoring and supply chain financing. The group ran into difficulties during a refinancing process in July when lenders requested a quality of earnings audit, raising concerns over FBG’s transparency, accounting practices, and off-balance sheet financing. This struggle to raise additional capital, along with geopolitical uncertainty and tariffs, drove an operational and liquidity strain that led to its bankruptcy filing.
In the filing, FBG reported US$10 billion ($13 billion) to US$50 billion of liabilities but only US$1 billion to US$10 billion of assets. What was alarming to markets, and subsequently drove investor jitters, were the questions surrounding the transparency and safety of private credit markets that have grown significantly in recent years, but more importantly, the possible systemic risks that private credit markets posed to the global financial system through contagion effects. Several large and well-known global financial institutions reported direct or indirect exposure to FBG, including a joint venture between Norinchukin Bank and Mitsui & Co, Jefferies Financial Group Inc, and UBS Group AG.
Ultimately, however, calm was restored as markets viewed this and other private credit stresses as idiosyncratic and more driven by market volatility than any systemic risk, with minimal spillover to the banking sector.
Reasons for this, in our view, were that:
- FBG was not the only auto-related company that went bankrupt in 2025 (others include Hypertech and Marellia Holdings, which both filed for Chapter 11 bankruptcy, while Tricolor Holdings, a subprime auto lender and used car retailer, filed for Chapter 7 bankruptcy).
- There are allegations of the potential existence of fraud at both FBG and Tricolor.
- The global financial system is better capitalised than in previous crises to withstand potential market volatility from negative news.
- Regulators have been aware for some time of the risks of non-bank financial institutions to the financial system and have been actively monitoring their influence. As illustrated in the International Monetary Fund’s 2025 October Global Financial Stability Report, the interconnectivity between private credit and the traditional banking sector has added an extra source of risk.
That’s not to say that credit markets are totally out of the woods. Market volatility could persist should headlines surrounding FBG or private credit surface again. This is due to the indirect interlinkages of private credit to the global financial system, for example, through credit default swap exposures by trade finance insurers.
The Bank for International Settlements (BIS) published BIS Papers No. 161 in October this year, titled The transformation of the life insurance industry: Systemic risks and policy challenges. The paper calls for enhanced supervision, harmonised standards, and macroprudential oversight to mitigate risks and preserve the sector’s stabilising role in the financial system, particularly given the rising exposure to private credit, which is seen as a key systemic risk. Life insurers, especially those linked to private equity, have shifted toward illiquid and hard-to-value structured credit and direct lending to boost yields. These assets increase vulnerability to market shocks and fires. Private equity-linked insurers also show higher allocations to affiliated assets and non-qualified mortgages, raising conflicts of interest. These trends heighten liquidity and governance risks, underscoring the need for stronger disclosure and regulatory scrutiny of private credit exposures.
For more stories about where money flows, click here for Capital Section
Picking the right pieces
The SGD credit market saw a fall in primary market activity in October, with overall issuance at around $2.9 billion across 16 issuers. This compares with $4.1 billion in September 2025 across 14 issuers. What is notable, however, is the wider variety of deals with four true high-yield issues coming to market. Among non-Singapore companies, Muangthai Capital PCL, a non-bank financial institution based in Thailand, priced two tranches of social bonds totalling $129 million, guaranteed by the Credit Guarantee and Investment Facility (CGIF). Two Middle Eastern banks (Riyadh Bank and Al Rajhi) priced SGD-denominated sukuks.
Tight spreads spur search for yield
In September, we opined that we see selectivity and caution seeping into the market, and this is likely playing out in the primary markets, with average issuance size in October 2025 at only $140 million, slightly lower than the around $150 million in September this year (excluding the two issues from HDB) and well below the $300 million in August. The lower volume, though, is supporting prices in the secondary market. With valuations tight among senior papers, structural high-yield, particularly corporate perpetuals, have benefited.
That said, Additional Tier 1 (AT1s) bank capital was affected during the month due to negative spillovers stemming from private credit jitters, while prices of UBS Group AG and BNP Paribas SA’s AT1s were negatively affected by idiosyncratic developments. We see signs that the search for yield has spread to the true high-yield space, and we expect that this segment, along with crossover and structural high-yield, may continue to benefit as we go into the end of the year. The extent of this benefit, though, must be considered against tight valuations and some concerns around fundamentals. As we approach the start of 2026, our message remains to stay positioned but remain defensive.
Andrew Wong, Ezien Hoo, Wong Hong Wei, and Chin Meng Tee are credit research analysts with OCBC’s Global Markets Research team. The contents of this article include contributions from Veron Ong Jun Xiang.
