Bridgewater Associates is the world’s largest hedge fund. Every weekday, it sends out a note to its clients entitled ‘Bridgewater Daily Observations’. Every so often, the firm allows us to republish, in part or in full, an individual edition of its ‘Daily Observations’.
The October 23rd edition of ‘Bridgewater Daily Observations’ addressed this question: How concerned should we be about recent developments in “credit markets”? Bridgewater’s short answer was/is: “Despite high-profile bankruptcies, when we assess credit markets overall, we don’t see signs of broad issues.”
The longer answer is excerpted (in part) below.
Bridgewater Daily Observations.
by Yusuf Jailani and Greg Weaving. (23 October 2025)
The recent bankruptcies of First Brands Group and Tricolor, along with concerns about risks in the regional bank sector, have raised the question of whether we are beginning a material credit downturn. While things can change, we do not currently see the dynamics that usually cause major credit problems.
The credit cycle is a fundamental component of the economic machine, operating with predictable cause-and-effect relationships that we embed in our investment process. While every cycle presents unique features—new lending products, different innovations—we believe the broad dynamics of credit expansion and contraction across cycles are far more alike than they are different. Historically, the most damaging credit cycles—those with a large and lasting impact on the economy—have featured some combination of three critical elements in their expansions:
Large credit creation, especially to less creditworthy borrowers or for speculative purposes.
A leveraged lender base that magnifies losses by being forced to withdraw capital when it is needed most.
Complacent market pricing that fails to differentiate between higher- and lower-credit-risk borrowers.
These features are, in turn, what fuel larger and more damaging loss cycles when the credit cycle turns. While conditions aren’t uniform across the market and can change rapidly, we think the credit cycle that has taken place has, so far, generally been resilient across these dimensions:
We’ve had little aggregate private sector borrowing, with relatively low levels of speculative issuance. Post-COVID growth was largely fueled by government spending and a cash-supported capital expenditure boom, not debt. This has kept balance sheets healthy and significantly reduced the risk of a sharp credit unwind causing a subsequent decline in incomes. Little credit has been directed toward aggressive uses like debt-fueled M&A or dividend recapitalizations, and while isolated exceptions exist, borrowing excesses appear limited.
Lenders are largely not overextended, and the rise of private credit (PC) has helped to diversify and de-lever the financial system. Across financing channels, lenders look well-positioned to extend new credit and cushion unforeseen shocks. In addition, the evolution of the credit system, driven in part by the rise of private credit, has made the overall ecosystem more stable. Following the financial crisis, banks de-leveraged and retreated from the riskiest lending segments. Less leveraged private credit lenders filled the gap, increasing the diversity of the lending pool and reducing the potential for contagion.
Market pricing reflects robust differentiation between higher- and lower-risk borrowers. In excessive credit cycles, the dispersion in spreads between strong and weak credit tends to collapse as investors aggressively chase yield, compromising lending standards. Today, while spreads in aggregate are low, underneath the hood, dispersion between borrower spreads is relatively elevated, which reflects healthy market dynamics and a reluctance by investors to compromise quality for yield.
This doesn’t mean that pockets of stress will not emerge, especially with some slowing in economic activity. The recent First Brands Group bankruptcy, for instance, stemmed from an aggressive debt-fueled strategy that later revealed potential issues around collateral financing. However, this kind of excessive activity has been rare. We believe these instances, while causing losses for some investors, are idiosyncratic, not systemic, and do not signal the start of a broader and more damaging credit contraction.
Going forward, we expect credit to play a larger role in the business cycle as borrowing picks up. The AI-spending boom is likely to enter a more credit-intensive phase as the buildout accelerates. At the same time, material progress on deregulation could unleash a wave of corporate activity. These forces have the potential to drive corporate credit creation up significantly.
As shown below, so far in this expansion, corporates have borrowed much less than they have in prior cycles. That reduces the risk and economic impact of a sharp reversal.
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Wait. Private lenders, who are funded by borrowing from banks, are LESS leveraged than banks, who are funded by deposits? If such a private lender gets into trouble and puts those bank loans at risk, there’s LESS risk of contagion? Credit quality spreads are [in fact, very] tight in the aggregate but “ under the hood” everything is OK? What does that even mean?