INSIGHTS

On April 27, 2026

AAM Viewpoints — Chokepoint

Financial markets tumbled in March as the Iran conflict upended energy markets and sparked a synchronized shock to the global economy. Since early March, the markets have experienced extreme volatility as oil prices surged to over $100 per barrel, casting a long shadow over the financial markets. While the U.S. economy has shown remarkable resilience over the last several years, the spillover effects from higher energy prices have been immediate and significant. The Strait of Hormuz remains a critical chokepoint for global energy transportation, and any disruption has created ripple effects across multiple industries, including fertilizers, with potential implications for the global food supply. Iran’s response of launching missiles and drones across the Persian Gulf has rattled investors, igniting fears of further escalation in hostilities. Meanwhile, U.S. economic momentum appears to be moderating, with consumer sentiment waning alongside subdued jobs growth. Rising energy costs have also contributed to renewed inflation fears, complicating the Federal Reserve’s policy path as it balances lowering interest rates and resurfacing inflation risks. Investor risk tolerance has already been pressured by ongoing uncertainties related to AI-driven disruption, concerns around private credit, and political dynamics in Washington. The future direction of the markets should be highly dependent on the duration of the Iran war. President Trump is now facing a chokepoint as he seeks to wind down military action and reduce energy prices ahead of the November mid-term elections.

TRENDING TOPICS

In recent months, a barrage of negative news has been unleashed in the $1.8 trillion U.S. private credit market. This market is an offshoot from the 2008 financial crisis, when regulators forced banks to set up higher capital reserves for risky loans.

Despite the rapid growth of the private credit assets class over the past decade, retail investors may not fully comprehend the underlying risk factors associated with direct lending, particularly among middle-market companies. Several recent high-profile defaults and redemption pressures have brought into question private credit opacity, liquidity constraints, and untested default and recovery rates in periods of economic downturns.

According to a recent Barclays report, many private credit funds have a concentrated exposure to software companies, a sector that has come under in-creased scrutiny due to potential AI-driven disruption. While we do not view the private credit market as facing systemic risks, enhanced transparency, particularly around shadow default rates, collateral characteristics, and the development of a recognized benchmark would help strengthen investor confidence in this important segment of the credit markets.

In light of these potential unforeseen pitfalls, investing in the private credit market may reward differentiated sourcing capabilities, disciplined underwriting, and a cautious investment philosophy.

Exhibit 1 shows returns for various in-dices for March, Q1, and year-to-date.

Source: Shenkman Capital | Past performance is not indicative of future results.

ECONOMIC UPDATE

Economic data released during the first quarter reflected a moderation in growth alongside renewed uncertainty surrounding trade policy, inflation, and geopolitical developments. While the U.S. economy remains on relatively stable footing, some key indicators have softened, suggesting the pace of expansion may be slowing.

Consumer sentiment showed modest improvement in March, with the Conference Board’s Consumer Confidence Index rising to 91.8 from 91.0 in the prior month. The increase was driven by stronger assessments of current business and labor market conditions, though expectations for the next six months declined. Despite the up-tick, rising energy costs and geopolitical tensions weighed on forward-looking sentiment and contributed to an increase in inflation expectations.

Manufacturing activity strengthened in March, with the ISM Manufacturing Index rising to 52.7, the highest level since 2022. However, the improvement was accompanied by a sharp increase in input costs, with the prices paid index jumping to 78.3, its highest level since mid-2022. Supply chain disruptions tied to the Middle East conflict and rising energy prices have contributed to longer lead times and elevated cost pressures, which may translate into broader inflationary effects in the coming months.

The housing market continues to face headwinds as higher interest rates weigh on affordability and construction activity. Construction spending declined -0.3% in January, with residential investment particularly weak, falling -0.8%. Mortgage rates rose to 6.30% in March, the highest level of the year, suggesting that elevated borrowing costs and excess housing inventory will likely continue to constrain residential construction in the near term.

HIGH YIELD UPDATE

The high yield bond market experienced a notable shift in tone in March as rising geopolitical tensions, higher Treasury yields, and renewed fund outflows weighed on performance. The ICE BofA U.S. High Yield Index (H0A0) returned -1.19% during the month, closing the first quarter at -0.55%.

Performance by rating reflected a clear bias toward higher quality credits as volatility increased. During the quarter, BB and B rated bonds both declined -0.38%, outperforming CCCs, which fell -2.21%, highlighting a notable flight to quality as investors became more selective amid widening spreads and macro uncertainty.

The Morningstar LSTA U.S. Leveraged Loan Index returned 0.54% in March and -0.55% for the first quarter. Loan performance improved during the quarter as outflows moderated and CLO (collateralized loan obligation) formation remained supportive; however, dispersion remained elevated, with lower-rated credits continuing to lag and the broader market still contending with weakness in AI-exposed sectors.

Primary market activity remained constructive in March across both asset classes. According to JPMorgan, high yield bond issuance totaled $21.0 billion, bringing year-to-date issuance to $79.8 billion. Leveraged loan issuance totaled $28.2 billion ($17.1 billion net), with LBO (leveraged buyout) volume reaching $17.6 billion, the highest level in over four years. CLO issuance remained a key driver, with $30.8 billion pricing in March ($18.0 billion net), bringing first quarter volume to $101.0 billion ($46.4 billion net).

According to JPMorgan, there were seven payment defaults totaling $8.5 billion during the first quarter, including $4.1 billion in bonds and $4.4 billion in loans. The trailing 12-month high yield default rate, excluding distressed exchanges, rose 2bps in March to 1.19%, while the leveraged loan default rate declined 9 basis points to 1.46%.

While credit markets have remained open to already-leveraged issuers, private equity sponsors are increasingly turning to dividend recapitalizations to return capital. PE companies issued $94 billion of leveraged loans and high yield bonds in 2025 to fund payouts amid a challenging exit environment. These transactions have drawn scrutiny as they increase leverage without improving earnings.

MARKET OUTLOOK

Investors are closely focused on the trajectory and potential resolution of the conflict with Iran, which remains a key driver of market volatility. A de-escalation of hostilities would likely spur a recovery in risk assets, particularly if accompanied by reduced energy prices.

Recent U.S. actions have significantly degraded Iran’s military capabilities; however, a determining factor of market stabilization will be the reopening of the Strait of Hormuz to ensure the safe passage of tankers and the normalization of global oil supply. A sustained decline in energy prices toward the $70 per barrel range would likely be an important signal of easing geopolitical risk. While an “unconditional surrender” appears un-likely, a ceasefire that completely dismantles Iran’s nuclear and missile capabilities could provide a basis for de-escalation and improve market sentiment.

The recent surge in energy prices could push headline inflation toward the 4% range, materially above the Federal Reserve’s 2% target. If economic growth slows and higher-income consumers begin to curtail spending, the U.S. could face a period of stagflation.

The U.S. economy could withstand the aftereffects of the Iran war as the benefits of the Big Beautiful Act materialize. For example, according to IRS data, tax refunds have averaged $3,623 through March 13th, or 11% higher versus the same period last year.

The first instinct of many investors is to sell on bad news. A prudent investor instead seeks to take advantage of disruptions in the market and buy in periods of market dislocation.

CRN: 2026-0409-13385 R

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The ISM Manufacturing Index is a monthly gauge on the level of economic activity in the U.S. manufacturing sector versus the previous month.

The ICE BofA Current 10-Year U.S. Treasury Index (GA10) is a one security index comprised of the most recently issued 10-year U.S. Treasury Note.

The ICE BofA U.S. Corporate Index (C0A0) has an inception date of December 31, 1972 and tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.

The ICE BofA U.S. High Yield Index (H0A0) has an inception date of August 31, 1986 and tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.

The Morningstar LSTA US Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market based upon weightings, spreads and interest payments.

The Refinitiv US All-Cap Focus Convertible Bond Index has an inception date of December 1993, is a subset of the Refinitiv US Convertible Bond Index and includes securities that have a price between 60 and 140 and a conversion premium of < 100%, among other criteria. The Refinitiv US Convertible Bond Index includes convertible securities that are denominated in USD, have a market value of over $300mm, and have underlying stocks that trade on US equity markets.

The Dow Jones Industrial Average is a price-weighted average of thirty blue-chip stocks that are generally the leaders in their respective industries.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

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