Oaktree's O'Leary and Panossian on What Credit's New Normal Means for Investors
Four years after the so-called "sea change" in interest rates began, nothing has changed back. In their 3Q 2026 Credit Quarterly1, Brookfield Credit Co-CEOs Bob O'Leary and Armen Panossian make the case plainly: the rate hikes of 2022 were not a blip in a multidecade yield compression trend. They were "a fundamental repricing of capital." With the U.S. 10-year Treasury recently crossing 5% and expected cuts failing to arrive, the authors argue elevated rates now represent a durable regime with meaningful consequences for investors and borrowers alike. The zero-rate era, they write, is "(still) over."
False Dawns
The recent history, as O'Leary and Panossian frame it, is one of persistent market miscalculation. When the federal funds rate peaked at 5.3% in 2023, consensus expected a cooling economy and rapid cuts to follow. A remarkably resilient U.S. economy, supported by high-income consumer spending and an accelerating AI investment cycle, made no such accommodation. The recession never came. Neither did the cuts.
The pattern repeated entering 2026. Markets priced in roughly 60 basis points of easing for the year. Through the third quarter, there was one hike and no cuts. The authors are direct: the market has been "overly bullish on rate cuts over the last few years." That persistent miscalculation is now showing up across the yield curve, as investors demand additional compensation for holding government bonds.
A Global Repricing
The yield move is not a U.S. story in isolation. In the U.K., 30-year government bonds are at their highest yield this century, approaching 6%. German bund yields have spiked despite their traditional safe-haven status. Japanese government bond yields, suppressed for decades under yield curve control, have climbed to their highest level in 30 years. O'Leary and Panossian are unambiguous about the conclusion: "Investors have broadly decided they want more compensation for holding government debt." The drivers are multiple: robust growth expectations pushing real yields higher, fiscal strain from persistent budget deficits, and an unprecedented wave of long-dated debt issuance financing an estimated $5.5 trillion in AI capital expenditure through 2030.
High Rates, High Yields
For credit investors, the picture carries a meaningful upside. The authors are precise: "Higher rates make for attractive credit yields even as average spreads are historically tight." High yield bonds now offer around 8%, more than double their level of five years ago. Floating-rate broadly syndicated loans yield over 9%, supported by a three-year SOFR above 4.5%. Critically, the authors note these assets deliver compelling income without the high duration "that has been punishing longer-dated credit." At a time when public equity valuations are stretched, this elevated contractual income is increasingly difficult to ignore.
The Borrower's Burden
The same rates enriching credit investors are exacting real costs on the other side of the ledger. Approximately 10% of senior loans now carry cash flow coverage below 1x. The pressure is sharpest in 2021-2022 leveraged buyouts structured at low rates and high multiples. With cuts off the table and spreads at risk of repricing wider, the organic escape route of growing revenue is itself constrained, as cash flows are redirected to debt service rather than business investment. "The mainstream credit markets will not meet this need," O'Leary and Panossian write. Weaker borrowers will increasingly require customized private capital solutions, delivered with speed and certainty.
The result is what the authors describe as "clear dispersion in the fates of weaker and stronger borrowers." Security selection, always important in credit, becomes the central discipline in this environment.
5 Key Takeaways for Advisors and Investors
- Elevated rates are the new baseline. Rate cuts have repeatedly failed to arrive, and planning around a return to near-zero yields is a strategic error with real portfolio consequences.
- Credit income is the standout opportunity. High yield bonds and floating-rate loans now offer historically compelling yields, providing meaningful income without extending unnecessarily along the curve.
- Dispersion demands selectivity. Weaker borrowers face genuine distress while stronger ones continue to perform. Credit manager quality and underwriting rigor matter more now than they have in years.
- Duration is a risk worth managing. Yield is available at shorter maturities. Reaching far out the curve for incremental return introduces volatility that the current data does not justify.
- Distressed and private credit will grow as an opportunity set. As weaker borrowers are shut out of mainstream markets, rescue financing and discounted liquid credit purchases represent a growing, differentiated return source.
Footnote:
1 O'Leary, Bob, and Armen Panossian. "3Q 2026 Credit Quarterly: New Terms." Oaktree Capital Management, Part of Brookfield, Sept. 2026, https://www.brookfield.com/sites/default/files/documents/Brookfield_Credit%20Quarterly_3Q%202026.pdf. Accessed 16 Oct. 2026.
