Private credit is no diversifier, First Eagle warns

Credit markets spent the second quarter reassuring insurers, and Noelle Sisco, head of portfolio strategy at First Eagle, is spending August warning them not to be reassured. Writing in Insurance AUM Journal, Sisco credits the rebound to easing geopolitical tensions, resilient growth, and easy financial conditions, with spreads tightening, fund flows improving, and primary markets selectively reopening, before adding the caveat that should sit at the top of every general-account allocation: dispersion has increased.

The second-quarter GDP print showed strength, with consumer spending carried by higher-income households and corporate earnings boosted by artificial-intelligence spending, while the July jobs report pointed to a slowing labor market that Sisco reads through seasonal and one-time factors, leaving a low-hire, low-fire dynamic intact. Inflation remains above target, geopolitical tensions still threaten energy markets, and consumer confidence has weakened even as spending holds, while corporate credit performance diverges by quality, with distress growing in select industries and consumer credit bifurcating between higher- and lower-income households. The mood, as she puts it, is that capital has become more conditional: investors are less willing to forgive mistakes.

Sisco's larger point is aimed at insurers' general accounts: public credit spreads are relatively tight, covenant protection is often limited, and private credit exposure can be tied to the same corporate conditions that drive public leveraged credit. What looks diversified by asset class, she argues, can share common risk factors, cutting at the portfolio habit of treating private credit as the uncorrelated sleeve of a fixed-income book. Traditional credit beta, in other words, carries vulnerabilities that spread levels do not show.

The warning is the credit-market version of this week's agency MBS call in these pages: a steepening curve proved no haven for agency MBS. The equivalent error here would be rotating from public leveraged loans into private credit without demanding anything new in exchange, leaving diversification in the label only if the exposure is to the same corporate condition.

Higher public yields have pushed insurers deeper into private assets rather than out of them, turning the general account into an underwriter of supply constraints, not merely a deployer of capital. The trade pays only if the new sleeve carries collateral, structural protections, or origination skill the public bond lacks. Desks that treat selectivity as a compliance exercise rather than an underwriting discipline will be the ones that feel the dispersion first.