Credit markets: Rising uncertainty

Credit markets are the marketplace that facilitate borrowing and lending activities among institutions and individuals via instruments like bonds, loans, and asset-backed securities. These markets drive global financial systems, shaping all aspects of economic resilience and long-term growth.

Over the past year, secured lending rates have steadily increased, reflecting tighter monetary policy and driving a shift in investment strategies toward lower-risk instruments. In response, financial institutions have enforced stricter covenants and imposed greater margin requirements.

Meanwhile, bankruptcies have accelerated as rising interest rates and overhead costs strain businesses, while persistent inflation continues to squeeze profit margins and challenge long-term viability.

Our Financial Instruments team have put together an in-depth analysis of the current developments - explore the insights below to see how it could affect your organisation.

Jorge Fernandez Revilla

Partner, Head of Asset Management

KPMG in Ireland

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What’s driving market vulnerabilities

Low quality of asset & underwriting

Private loans rely on collateral quality for risk and fair value assessment. Weak underwriting and poor borrower evaluation limit lenders’ ability to manage exposure. Ineffective risk assessment and low-quality assets raise susceptibility to default and credit risk from the outset.
Surge in securitisation

Securitisation issuance have surged, fuelled by strong investor appetite. In response, market structures have become more flexible, incorporating diverse asset types. Although this enhances funding options, it also increases systemic risk if underlying asset quality deteriorates.
Disclosure opacity

The opaque nature of private credit reporting limits due diligence, enabling misrepresentation of risks. Disclosure restrictions on lending and borrowing hinder market scrutiny and reduce effectiveness of risk analysis.
Double pledging

A practice of utilising the same asset as collateral for borrowing of funds from different sources is called as double pledging. The practice tends to create a conflict in the priority of claim on the collateral asset in a recovery scenario and lead to potential losses despite claim seniority.
Deferring obligations

Private credit borrowers may opt for payment in kind (PIK), deferring interest to loan expiry. While useful, switching from cash to PIK signals weak revenue and potential distress, indicating inability to meet interest obligations during the term.

The graphs below show a sharp rise in HY and IG default rates between Q2 2025 and Q3 2025. This trend suggests that investor expectations for credit markets have deteriorated.

Moreover, higher default rates reinforce perceptions of slowing economic growth, which in turn weighs on business performance. Consequently, investors exhibit increased caution and reluctance in credit markets.

How market volatility is affecting borrowing and lending conditions

Rising uncertainty increases expected defaults; adjustable-rate loans strain borrowers.
Market participants demand higher premiums for added risk.
Small and Medium Enterprises (SMEs) face cashflow crunch as consumer spending falls, squeezing margins.
Investors shift to safer assets, causing a “flight to safety” toward treasuries and lower returns.

The below graph indicates that there has been sharp decline in the yields offered by US treasuries between September of 2025 vs December 2024.

The apparent curve inversion stipulates investor’s resistance to fund long term projects given lower returns offered for higher term risk. Furthermore, persistent decline in medium term yields relative to shorter term yields constraints the flexibility of the credit availability and increase market uncertainty.

How can KPMG help?

At KPMG, we specialise in fixed income valuation across a wide spectrum ranging from vanilla instruments to complex securitisation products and private debt facilities. Our solutions are designed to help clients navigate uncertainty, assess risk appropriately, and gain comfort over the valuation of their fixed income positions.

We employ a range of valuation techniques, including discounted cash flow, scenario-based modelling, waterfall cash flow allocation, and matrix pricing. Our expertise extends to tranche-based valuation approaches that incorporate macroeconomic factors and collateral performance, blending industry practices with deep technical knowledge to deliver reliable results.

Beyond valuation, we conduct robust recovery scenario testing to evaluate an entity’s ability to meet obligations under stress conditions. This includes factoring in current credit environments, market expectations, and potential costs in distress scenarios, enabling us to determine collateral coverage for loans or debt positions.

We also perform detailed relevance and reliability assessments of valuation inputs, benchmarking against industry trends and reviewing provider methodologies to ensure alignment with market standards. Our research-driven approach ensures accuracy and compliance with applicable reporting requirements.

At our core, we prioritise integrity and excellence that emphasises on doing what’s right to the highest standards. We apply these across all our services fostering trust with all our clients. We are strongly poised to assist our clients in navigating the uncertainties in the current credit climate.

Valuation techniques

We employ a range of valuation techniques, including discounted cash flow, scenario-based modelling, waterfall cash flow allocation, and matrix pricing. Our expertise extends to tranche-based valuation approaches that incorporate macroeconomic factors and collateral performance, blending industry practices with deep technical knowledge to deliver reliable results.
Recovery scenario testing

Beyond valuation, we conduct robust recovery scenario testing to evaluate an entity’s ability to meet obligations under stress conditions. This includes factoring in current credit environments, market expectations, and potential costs in distress scenarios, enabling us to determine collateral coverage for loans or debt positions.
Relevance and reliability assessments

We also perform detailed relevance and reliability assessments of valuation inputs, benchmarking against industry trends and reviewing provider methodologies to ensure alignment with market standards. Our research-driven approach ensures accuracy and compliance with applicable reporting requirements.

At our core, we prioritise integrity and excellence that emphasises on doing what’s right to the highest standards. We apply these across all our services fostering trust with all our clients. We are strongly poised to assist our clients in navigating the uncertainties in the current credit climate.

Get in touch

Should any of the matters outlined in this credit markets outlook be of interest, or if you would like to explore the potential implications for your business, please feel free to contact one of our team members.

We would be pleased to assist you further.