Moody’s Analytics updates its mid-year US credit risk outlook for 2026–2027, with a focus on how private credit risk is evolving.
Key takeaways
- The average credit risk of US listed companies fell to its lowest sustained level since 2022 but remains historically elevated.
- The underlying factors that contributed to a gap between the credit risk of larger borrowers with more access to capital markets and smaller, floating-rate, loan-financed borrowers are still in place.
- Improvement in credit risk was shared broadly across industry sectors in Q2.
- Unrated AI infrastructure-related names saw credit risk improvement, while mature, application-layer franchises saw credit deterioration.
- Public and private BDC credit risk rose at a similar pace, coinciding with rising fund redemption pressures.
- Moody’s Analytics’ forecasts for realized default rates point to further improvement through the first half of 2027, but risks to the downside remain.
US credit risk still missing a strong catalyst for sustained improvement
US corporate credit risk improved in the first half of 2026, and Moody’s Analytics expects average forward-looking probabilities of default (PD) to continue to decline through the last half of 2026 and into the first half of 2027. But the fragmentation underneath, across public and private credit, and within each market, has not resolved. That’s because forces behind that fragmentation — higher-for-even-longer interest rates, refinancing already pulled forward among public borrowers, economic growth concentrated in a narrow range of industry sectors — remain largely in place.
AI disruption has hit software valuations hard, and the critical question of which business models may benefit and which may face increasing pressure is only now beginning to emerge in the credit data. Unrated software companies’ risk measures that look beyond short-run volatility split cleanly along those lines through the SaaSpocalypse selloff, contributing to a broader unease about private credit that has contributed to volatile valuations and increased business development company (BDC) redemptions past their gates. That unease has real substance behind it: Forward-looking probabilities of default for both public and private BDCs have risen since the fourth quarter of 2025 alongside the jump in redemption requests.
The economic growth stall-speed risk this report flagged in April is still one to watch, just later than expected. First-quarter US GDP growth was revised up to 2.1%, but the second quarter is estimated at 1.5%, right at the threshold below which defaults have historically begun to accelerate. July’s Fed meeting tilted that risk further: markets pared back rate-cut expectations for the year and, for the first time this cycle, began pricing real odds of a rate hike instead.
Persistent gaps: Another look at the K-shaped credit market
The average one-year expected probability of default for all US listed companies stood at 7.6% in July 2026, down from 8.5% a year earlier and its lowest sustained level since 2022. US corporate credit risk climbed to a post-GFC peak in April of 2025, a level with little precedent outside of a full-blown recession, in response to the rapid sequence of US tariff actions, a correction in US equities, and heightened market volatility. High-yield companies followed the same path to a lesser degree, touching a post-Pandemic peak the same month. Twelve months on, both measures have retraced much of that spike.
The decline in average credit risk in the second quarter is notable, but as we discuss later in this report, a key question remains about how much further it can fall without stronger macroeconomic support. The average one-year expected PD for US high-yield companies, at 2.8% as of July, is down from 3.3% a year ago. The level remains firmly within the range the average high-yield PD has occupied since 2022, below its roughly 3.5% historical average, but also well above the multi-year lows reached in 2021.
Credit risk continues to retreat from last year’s peak, but the retreat may be losing momentum
Average probability of default, all US public companies vs. US high-yield companies
Note: The chart features all US public companies (about 5,200 listed firms, both unrated and rated) and public US high-yield companies rated by Moody’s
Ratings (about 400 companies).
Source: Moody’s EDF-X platform
Perhaps more important than falling levels of credit risk is the persistent gap between the two markets’ average credit risk measures. As of July, the difference in average PD between the all US listed companies portfolio and the US high-yield portfolio fell to 4.8 percentage points, down from 5.2 percentage points a year ago and considerably lower than the peak 6 percentage point difference recorded in 2023.
Despite the narrowing of the gap in average credit risk, it remains historically wide. Prior to 2020, the gap averaged 1.6 percentage points. The persistent gap in average PD indicates that many of the forces contributing to differences in risk levels remain in place: Average credit risk is a function of borrower size, access to capital markets, floating vs. fixed pay, and whether borrowers refinanced at lower rates and with longer maturities before or early into the Fed’s rate increase cycle.
It may seem counterintuitive that the average PD for US high-yield companies is roughly a third that of all US listed companies, but the difference in average risk is largely driven by differences in portfolio composition. The median-sized high-yield bond issuer is almost 12 times larger (in terms of assets) than the median company in the all US listed portfolio, and has access to larger, liquid pools of capital compared to medium-sized, loan-financed companies. Importantly, many high-yield bond issuers proactively refinanced their liabilities at lower, fixed rates.
The protective moat for high-yield borrowers may be tested in the near future. Markets went into 2026 pricing three quarter-point Fed rate cuts; by the July meeting, they were pricing one, and three FOMC officials were reported as tilting toward raising rates rather than holding them. A 30-year Treasury yield at its highest since 2007 raises the cost of refinancing that has helped protect larger borrowers so far. Should growth disappoint or a credit event reprice risk broadly, the size advantage that has held the K-shaped divide in place could compress quickly.
Average probability of default levels by industry sector
Among all US public companies, improving credit risk in the second quarter was shared across almost all industry sectors. Average probabilities of default improved year-over-year in nineteen of twenty sectors as of the second quarter of 2026. The lone sector moving the wrong way was Investment Management, ticking up to 3.2% — a small move in absolute terms, but notable for being the only one, and for sitting in the same corner of the market (asset managers and alternative-investment vehicles) that houses much of the private credit apparatus discussed later in this report.
The high-yield group showed more churn beneath its own improving headline average forward-looking PD. Fourteen of nineteen sectors improved, and some of last year’s worst-positioned high-yield sectors improved sharply: Aerospace and Defense average PD fell by 81%, REITs by 79%, and Energy by 72%. Five sectors showed an increase in average credit risk: Natural Resources, Business Products and Services, Finance Companies and Brokers and Dealers, Investment Management, and Medical and Pharmaceuticals.
Note: 19 of 20 industry sectors shown. There are no banks in the high-yield portfolio so the sector is excluded from the graph to facilitate comparability.
What probability of default tells us
Probability of Default (PD) metrics from Moody’s Analytics’ EDF-X platform provide a forward-looking forecast of the likelihood that a company will experience a credit event over a one-year time horizon. The average PD of all listed US companies, for example, gives a measure of the future credit health of US listed companies (only about 20% of which are rated by Moody’s Ratings).
The default rates reported by Moody’s Ratings record the realized (or backward-looking) incidence of default over the past twelve months. For both probability of default and default rates, default events include missed debt or principal payments, bankruptcy or its equivalent, and distressed restructurings/debt exchanges.
Disaggregating the data into industry sectors or company types reveals that each sub-portfolio tells a different risk story.
A closer look at AI disruption in the software sector
In the industry sector discussion above, we did not specifically call out the Technology and IT Services sector, whose average PD improved in line with the broader average, falling from 10.4% to 9.2% year over year. But the Technology and IT Services sector illustrates well how a single statistic can obscure important divergent trends. The software sector sell-off the media have taken to calling the “SaaSpocalypse,” a period in Spring 2026 when fears about AI-agent disruption erased roughly $1 trillion of software market capitalization, appears not to have affected average Technology and IT Services sector credit risk in the second quarter. But forward-looking PDs do not necessarily completely address the risk many investors have in mind, which is the longer run durability of some software company business models. To tackle that question, we require a credit risk measure that looks at credit risk in longer horizon, through-the-cycle terms.
We formed a portfolio of sixteen Technology and IT Services sector companies and assessed their credit risk using Moody’s new EDF-X CreditGradient model. None of the companies in the portfolio carry an actual agency rating from Moody’s Ratings. The names were selected as a representative sample of the sector, not because any one company’s credit risk was believed to be high or low. The purpose of this exercise was not to score sector risk, but to investigate whether any patterns emerged when we looked at Technology and IT Services on a through-the-cycle basis.
The time window we examined, June 2025 to June 2026, brackets the “SaaSpocalypse” event. Scored on financial statements dated before and after that event, the risk measures for the sixteen-company portfolio split almost evenly: Six companies’ credit measures improved, four deteriorated, and six were unchanged.
A new lens on credit risk: EDF-X CreditGradient
EDF-X CreditGradient is a new model-based credit risk measurement solution that generates risk assessments directly on an ordinal ratings scale calibrated to historical Moody’s Ratings’ credit ratings, and is designed to support consistent comparison of credit quality across public and private exposures. CreditGradient risk measures are distinguished by a .m suffix (e.g., Baa2.m) to clearly distinguish them from Moody’s Ratings’ credit ratings.
CreditGradient goes beyond probability of default (PD) by incorporating scorecard-like credit factors, including company scale, leverage, profitability, industry sector, and sovereign context, within a supervised machine learning framework trained on 25 years of Moody’s proprietary data.
In testing, CreditGradient risk measures perform consistently across private companies, smaller borrowers, and the investment-grade/speculative-grade boundary. Find out more.
US credit risk outlook
Moody’s Analytics’ latest baseline economic forecast projects GDP growth of 2.1% in 2026, revised up as US economic growth reaccelerated in the first quarter of 2026. As noted in our last report, the historical relationship between annual default rates and annual GDP growth suggests that there is an economic growth “stall speed” below which the pace of credit events begins to pick up: Historically, periods in which GDP growth fell below about 1.5% per annum have often seen corporate defaults accelerate. The upward revised GDP forecast adds a welcome buffer that may help support aggregate credit quality, but leaves little room for disappointment. Preliminary estimates of second quarter GDP growth come in at 1.5% — uncomfortably close to the historical GDP growth stall speed.
Credit risk improvement to continue into 2027, but may run into headwinds
The average probability of default has historically led realized default rates by roughly twelve months, explaining between 75% and 85% of the variation in defaults that eventually occur. Moody’s Analytics uses this relationship to translate today’s average PD readings into a forward-looking estimate of Moody’s Ratings’ headline trailing twelve-month default rates. On that basis, the near-term outlook is expected to continue to improve into the first half of 2027.
Moody’s Ratings’ trailing twelve-month default rate for US speculative-grade bond issuers stood at 4.0% in July 2026, down from 4.2% a year earlier. Leveraged loan issuers saw their default rate reported by Moody’s Ratings fall more sharply, to 5.2% in July from 6.6% a year prior, after peaking at 7.7% in November 2024.
Moody’s Analytics projects that the US speculative bond default rate will continue to drift lower, toward roughly 3.3% by the middle of 2027, holding in the range it has trended since 2023. For leveraged loans, the forecast points to a low default rate near 4.1% around the turn of the year, before drifting back up toward 4.5% by the middle of 2027. Only more time (and data) will tell whether that reversal represents a dip inside a plateau or a pause before a new leg down.
Note: The left chart features all US public companies (about 5,200 firms), and the right chart US high-yield companies rated by Moody’s Ratings (over 400 public companies). Default rate projections are based on Moody’s Asset Management Research team’s estimates.
Sources: PD measures from Moody’s (EDF-X platform), historical default rates from Moody’s Ratings
The risks to the outlook appear to run, however, mostly in one direction. Macroeconomic conditions remain only modestly supportive of easing credit risk. On the surface, conditions may look benign: Credit spreads sit near multi-decade tights, and the unemployment rate has ticked lower in recent months. A key threat, though, is the possibility of a higher-for-even-longer Fed. Markets began 2026 pricing three quarter-point rate cuts; after July’s hawkish, three-dissent rate hold, they now price only one, with real odds of a hike priced in for the first time this cycle. A modest disappointment on growth, inflation, or the labor market could be enough to stall the forecast’s improvement, if not reverse it outright.
Missed debt payments a rising share of defaults
Private credit is sometimes singled out as the corner of the market where credit risk may most likely be hiding. The data support that story only partially. The previous sections of this report discussed how public credit carries its own potential vulnerabilities. A more accurate description of the apparent divide across markets is really one of degree and visibility.
Measuring default risk in private credit is challenging, as even the definition of default itself is less a binary outcome than a sliding scale. The opacity of the asset class makes it difficult to estimate a market-wide measure of credit risk. By excluding distressed exchanges, however, Moody’s Analytics can approximate the default rate in the private credit direct lending space, applying an operational definition of default that excludes “soft” credit events, such as distressed debt exchanges.
The increase in restructurings shows the shift in distressed dynamics
Sources: Moody’s Ratings; and default rate calculations excluding distressed exchanges by Moody’s Analytics (Asset Management Research)
Distressed exchanges accounted for 65% of all default events in 2025, a third consecutive record year extending a run of credit events that has defined this default cycle. Strip distressed exchanges out of Moody’s Ratings’ global speculative-grade default rate calculation and the 2025 figure falls to 1.6%, roughly a third of the 4.4% headline number.
Through the first half of 2026, the composition has shifted. The distressed-exchange share has eased to 44% within the high-yield population even as the ex-distressed-exchange rate has risen to 2.8% and Moody’s high-yield default rate was essentially unchanged at 5.0%. Read together, these trends indicate a market where restructurings are becoming relatively less common while missed payments and bankruptcy filings are becoming somewhat more common — arguably a less favorable mix even though the headline high-yield default rate has barely moved.
BDC credit risk showed some cracks in the second quarter
Publicly traded BDCs offer one of the more transparent windows into private credit risk. The average PD for public BDCs rose to 0.51% in July 2026 while the Baa-rated corporates portfolio held steady at 0.27%. The difference in average credit risk between these two groups increased to its widest level on record in the second quarter, exceeding the previous record gap in 2021. Baa credit ratings are the lowest rung of the investment-grade portion of Moody’s Ratings’ scale.
Average probability of default for public business development companies and Baa-rated public companies
Source: Moody’s EDF-X platform
BDCs often target a Baa rating level because it balances several considerations, including the cost of borrowing, investor confidence, and compliance with investment mandates from institutional investors, making it a good benchmark for comparison.
Note: Each series is indexed to Q1 2025 = 100. Average PDs are weighted by asset value. The average PD line for public BDCs is the same as the previous graph, but at a quarterly interval.
Source: Moody’s Analytics EDF-X; BDC 10-Q and 10-K financial statements filed with the SEC (left).
Source: Moody’s Ratings (right).
Public BDCs are a useful proxy for private credit risk, but only a partial one, and do not fully capture what is happening inside the private credit vehicles the market has become most uncertain about. To get a wider read on the market, we extend our analysis to non-traded perpetual (or private) BDCs, roughly 100 funds filing 10-Qs and 10-Ks, which we score using Moody’s EDF-X RiskCalc model from 2025 through the second quarter of 2026. We caution against over-reading the difference in average PD levels between public and private BDCs, since each is scored with a different model, but the rates of change offer a useful, comparable signal. The data shows that average probabilities of default for both public and private BDCs began rising the third quarter of 2025, coinciding with the increase in BDC redemption requests.
Since the third quarter of 2025 public BDCs have seen their average probability of default rise by 44%, from 0.34% in Q3 2025 to 0.49% in Q2 2026. Private BDCs witnessed a 29% rise in their average forward-looking PDs, from 0.78% in Q3 2025 to 1.01% in Q2 2026. Over the same time period Baa-rated public companies, a natural risk benchmark since many BDCs typically target a similar rating level to satisfy leverage covenants and institutional mandates, saw their average expected probability of default rise from 0.23% to 0.25%, a 9% increase. The increases in credit risk among BDCs from the third quarter of 2025 through the second quarter of 2026 closely track the window in which First Brands and Tricolor collapsed and the first BDC redemption gates were challenged.
The BDC redemption data shows a similar trend over the same timeframe. Actual and reported redemption requests roughly doubled in Q4 2025 from the previous quarter. Through all of 2025, however, reported redemption requests at rated non-perpetual traded BDCs remained broadly aligned with actual payouts. That changed abruptly in 2026. Average first-quarter requests jumped to 8.9% against payouts of 4.7%; by the second quarter, average requests reached 10.5% against payouts of just 4.4%.
BDC redemption requests in excess of gates is not prima facie evidence of credit stress. A redemption gate is a liquidity mechanism, and they appear to be functioning as designed. But rising credit risk and rising redemption pressure are moving together and on the same timeline, in an opaque segment of the market. Whether that combination stays a liquidity story specific to fund structures, or becomes one of the first visible symptoms of broader, real credit deterioration, is likely to be one of the more consequential open questions in US corporate credit through the rest of 2026.
About Moody’s
Moody’s provides data, intelligence and analytical tools to help business and financial leaders make confident decisions. Moody’s has highly skilled analysts, rich data, robust tools supported by groundbreaking technologies, and a view of the future informed by more than 115 years of expertise. We help customers accelerate value creation in this Era of Exponential Risk in 4 ways including:
Moody’s provides data, intelligence and analytical tools to help business and financial leaders make confident decisions. Moody’s has highly skilled analysts, rich data, robust tools supported by groundbreaking technologies, and a view of the future informed by more than 115 years of expertise. We help customers accelerate value creation in this Era of Exponential Risk in 4 ways including: - Ratings – We strive to be the global rating agency of choice for debt issuers and investors
- Research & Insights – Premier fixed income research busines
- Data & Information – A data business powered by one of the world’s largest database on companies (450M and growing) and credi
- Decision Solutions – Three cloud-based SaaS-businesses serving mission-critical Banking, Insurance and KYC workflows
Source: Moody’s
