Why Credit Markets Offer a Strategic Edge in the Tariff-Driven Volatility of 2025

The global economy in 2025 is a chessboard of uncertainty, with trade wars reshaping supply chains, interest rates lingering near decade highs, and equity markets oscillating between hope and fear. Amid this turbulence, one asset class stands out for its resilience and opportunity: credit. Leveraged loans, high-yield bonds, and private credit—often dismissed as “risky”—are now offering a structural edge to investors who can navigate the noise. As Oaktree Capital’s recent outlook underscores, credit markets are not just surviving the storm—they’re positioning themselves to thrive.

The Case for Credit: Resilience in a Volatile Landscape

The defining feature of 2025’s markets is asymmetric volatility: equities swing wildly on geopolitical headlines, while credit markets, anchored by contractual cash flows, maintain a steadier course. Consider the data:

Equity investors face relentless swings, while credit markets, despite widening spreads in speculative-grade bonds, have held defaults far below crisis levels. As of Q1 2025, U.S. high-yield default rates lingered at just 1.2%, a fraction of the double-digit spikes seen in prior downturns.

This stability is no accident. Credit instruments, particularly senior loans and secured bonds, benefit from cash flow prioritization and collateral claims that equity lacks. In a world where trade disputes and Fed policy shifts create macro dislocations, these structural advantages are critical.

Oaktree’s Warning: The Looming “Fat Pitch” in Private Credit

While defaults remain low, Oaktree’s analysis highlights a stark divergence between public credit markets and private credit. The latter faces headwinds that could create a buying opportunity of historic proportions:
- Trade Policy Paralysis: U.S. tariffs announced in early 2025 have stalled M&A activity, leaving private equity firms to hold portfolios longer. Over 30% of PE-owned companies are now in “extended hold” mode, with no clear exit path.
- Supply-Side Constraints: Business development companies (BDCs), a key private credit source, face redemption risks as retail investors retreat from volatile markets. This could shrink private credit supply, pressuring borrowers who lack refinancing options.
- Valuation Discounts: LPs (limited partners) in private credit funds are demanding steep discounts—often 50 cents on the dollar—to offload illiquid positions.

These dynamics create a “fat pitch” for contrarian investors. Oaktree’s warning about double-digit defaults in private credit isn’t a prediction—it’s a strategic signal. Defaults may not yet be widespread, but the structural risks are clear. As the firm notes, “Defaults are not a question of ‘if,’ but of ‘when’—and the ‘when’ is approaching faster than many anticipate.”

The Opportunity: Income, Liquidity, and Contrarian Value

For investors with a 3-5 year horizon, credit offers three compelling advantages:
1. Income Engine: High-yield bonds yield ~8%, while senior loans offer floating-rate coupons (often 100+ bps above Treasury rates). These returns are contractual, not contingent on equity multiples.
2. Liquidity Buffer: Public credit markets remain accessible, even as private credit freezes. ETFs like the iShares iBoxx $ High Yield Corporate Bond (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) provide liquidity in an otherwise illiquid space.
3. Contrarian Value: The 50c discounts in private credit reflect panic, not fundamentals. Opportunistic buyers can acquire assets at prices that assume the worst-case scenario—while reality may offer far better outcomes.

The Path Forward: A Disciplined, Oaktree-Style Strategy

To capitalize on this edge, investors should mirror Oaktree’s approach:
- Focus on Quality: Prioritize senior loans and BBB-rated bonds, which combine safety with yield. Avoid CCC-rated paper, where spreads have already widened to 1,100 bps—a sign of investor skepticism.
- Leverage Liquidity: Use public credit instruments (e.g., HYG) to hedge private credit exposure.
- Buy the Dislocation: Private credit funds and direct lending opportunities priced at 50-70 cents on the dollar offer asymmetric upside.

Conclusion: The Time to Act is Now

In 2025, credit markets are the ultimate asymmetric bet. They offer income, stability, and a contrarian entry point as macro risks peak. Oaktree’s warnings about private credit defaults are not a call to retreat—they’re a roadmap to seize dislocations. For investors willing to think long-term and embrace the volatility, the rewards are clear: credit is the asset class of this fractured decade.

The question isn’t whether defaults will rise—it’s whether you’ll be positioned to profit when they do.