Some investors are growing wary that private debt lenders could be unprepared for a potential spike in credit defaults if the US Federal Reserve were to adopt a hawkish monetary policy, according to a survey by fund administration firm Ocorian. In the survey of 100 capital markets investors, including those at investment banks and private capital businesses, 47% of respondents doubted private credit managers' ability to minimise losses on defaulted loans. An increasingly positive outlook on the US economy paired with inflation fears may pave the way for the Fed to increase the base interest rate earlier than expected. Even as the base rate moves up, borrowing spreads stay the same, meaning the rate increase would push up middle market companies' cost of debt. "With a stronger economic outlook and vaccinations continuing, it is not unreasonable to see a case for the Federal Reserve to begin raising short-term interest rates sooner than their current guidance of 2023," said Arthur Torrey, a managing director at asset manager NYL Investors.
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