Private credit markets are showing signs of strain, but risks remain largely contained, says Nuveen’s Laura Cooper. The senior investment strategist discusses the recent volatility in the private credit market and how the risks, for now, appear “idiosyncratic rather than systemic”. Cooper unpacks managing risk, protecting portfolios, and avoiding liquidity squeeze during times of market stress.
Looking to the upcoming week and months ahead, she shares her outlook on the Federal Reserve’s FOMC meeting and the interest rate cycle; she discusses navigating data distortions due to the US government shutdown and offers her projections on market tailwinds and liquidity for the rest of 2025.
Interview
Jo Gallagher – We’ll have a heavy week in terms of macro events, including the Fed’s interest rate decision. What will you be monitoring, though, and what has the potential to move market sentiment?
Laura Cooper – We’ll be watching for trade developments. We’ll also be watching for tech earnings, but I think market attention will largely be focused on that Fed meeting, given the markets have effectively pre-committed the Fed to this easing cycle with both October and December fully priced. We’ll be watching, really, for the communication that comes from Fed Chair Powell, given that their messaging so far has been fairly consistent, suggesting that employment and inflation data really hasn’t changed much since that September meeting, which does leave the path of least resistance towards that rate cut. Perhaps what’s more interesting though, is actually looking at market pricing now, the odds of a cut fall materially up until we see Fed Chair Powell’s departure. And then looking at that June 2026, meeting, that’s when we see higher probability of cuts coming through, which is just that markets are already positioning for a more dovish tilt when we see those composition shifts from the FOMC (Federal Open Market Committee). For this week in particular, we will certainly be watching for any impact of the US government shutdown on the Fed’s calculus. At this point, markets are betting about 50% odds that that could end the first week of November, we’ll be watching for crucial dates around October 31 and November 1, because that’s when the military payments are due. That’s when SNAP (Supplemental Nutrition Assistance Program aka Food Stamps) benefits end. But even when we see the reopening, we will still have these data distortions due to a lack of data collection, and that still leaves this opaqueness for policymakers. So it sets up for the Fed to have a difficult kind of communication challenge going forward and trying not to jolt really duration positioning at this juncture, given what’s really already fully in the price from an easing perspective,
Jo Gallagher – There are growing concerns in the private credit space, with some describing the problems as idiosyncratic, and others saying that they’re systemic. How worried should we be, and what is the potential for contagion?
Laura Cooper – I think most of the risks at this juncture look to be idiosyncratic. We’re not seeing signs of systemic stress, and this largely reflects this combination of weak loan covenants against a backdrop of excessive investor demand. Certainly, the pressure has been concentrated in lower-quality credit segments, and yes, while volatility did pick up for the first time in quite a while, broader credit markets did absorb it smoothly. We saw an orderly backup to the spike in vol that has already begun retracing. Volume associated with the move was light. We saw less than year to date, averages throughout most of the recent episodes. So investment grade credit, for example, we saw volumes about 50% below what its peak has been earlier this year, and flows overall were pretty balanced. So we didn’t see this disruption in risk liquidity transfer. I think overall, recent events just increasingly capture these late-cycle dynamics, where we do tend to see this greater dispersion. You know, dislocations emerge because when stress surfaces in one pocket of credit, you know, it typically is not in isolation. So I think more broadly, this is a reminder that private credit is maturing from a niche alternative, really, to a core institutional holding, and that maturity means complexity. So as private markets become more institutional, that contagion risk can actually transfer faster through sentiment than fundamentals. And so the cautious reaction that we did see to yes idiosyncratic events, whether that was decompression or a flight to quality, I think it just emphasizes that as the asset class scales, we really need to differentiate quality in what’s becoming a much more complex credit ecosystem.
Jo Gallagher – So how can PMs (portfolio managers) protect their portfolios against these kinds of risks and advise traders on the desk?
Laura Cooper – Well, I think at this stage of the cycle, portfolio protection isn’t just about avoiding risk, it’s about being selective and liquid enough to respond when dislocations appear. As liquidity tightens and credit matures, really the key is reducing exposure to the most crowded trades and upgrading quality within spread sectors. Of course, you know timing that is nearly impossible, so maintaining some allocations to carry and spread is key. You don’t want to be a victim to the ebbs and flows of the recession risks. And I think the other key is just around underwriting discipline, so knowing work credit risk is being properly compensated and where it isn’t. And in speaking with our fixed income portfolio managers, we know they’re leveraging fundamental underwriting to really distinguish resilient credits from those that are overly reliant on refinancing windows that could narrow quite quickly if this volatility returns. And then, I think finally, managers should really be prepared to monetize volatility, so that can mean holding more risk-free assets to provide liquidity when correlations rise, or even leaning into oversold credits, where spreads overreact to idiosyncratic stress. Here at Nuveen, we’re looking to hold dry powder, whether that’s in short-duration Treasuries, or AAA ABS (asset-backed securities) to become thaprovider of liquidity when correlations spike, as historically, that pivot does tend to add about 50 to 70 basis points of excess returns through the early stage widening of a credit cycle. So I think all in late cycle risk management is all about liquidity, optionality. So the winners in this cycle will be those with the liquidity to deploy, and not just those who can avoid upcoming drawdowns.
Jo Gallagher – And finally, what else do trading desks need to be aware of as we approach the final few months of the year?
Laura Cooper – I think heading into the final stretch of 2025 and into 2026 we are looking at fewer tailwinds, but stronger ones. So fiscal support, lighter regulation, the sustained investment and tech and infrastructure are likely to keep this US growth impulse alive and even spur greater M&A activity. In Europe, we should start to see some of that fiscal support materialize more meaningfully as well. But that said, late-cycle signals are getting harder to ignore. So energy and data center costs are rising. Household budgets remain squeezed, and confidence is fragile, and certainly inflation hasn’t fully disappeared, not to mention geopolitical risks and lingering, really central bank credibility concerns. So I think it’s clear that heading into 2026, we are going to see more two-way risk, and in speaking with our traders, their kind of key message is, don’t mistake the calm for complacency, liquidity premia are re-emerging, and cross-market correlations remain high. So this is a market that still rewards selectivity and liquidity, discipline. The easy beta trade is behind us, let’s say, and late cycle markets will reward liquidity, selectivity, and patience, and not necessarily leverage, is what we’ve been seeing.
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