Weekly Investment Update (08/28/2026)

The next  Weekly Investment Update will be published on September 11 due to the Labor Day holiday.

Washington has again turned to economic pressure as a foreign-policy tool, with new sanctions on Iran and a renewed tariff dispute with Canada. Both are worth watching, but neither currently looks large enough to alter the underlying economic trajectory. In Iran’s case, the greater reliance on sanctions rather than renewed military escalation is arguably the more constructive path for markets. And while the tariff rhetoric has intensified, investors have become increasingly accustomed to distinguishing negotiating positions from final policy outcomes.

At the same time, the fundamental story continues to provide an important counterweight. Nvidia’s latest results and guidance were another powerful confirmation that AI infrastructure demand remains exceptionally strong. The next major test comes from Fed Chair Kevin Warsh at Jackson Hole, where investors will be looking less for a specific rate signal than for a clearer sense of how he intends to balance still-elevated inflation against a durable growth backdrop. Taken together, these developments reinforce a familiar theme: markets can absorb a meaningful amount of policy and geopolitical uncertainty when earnings, investment, and credit conditions remain fundamentally sound.

Economic Pressure Returns as a Key U.S. Foreign Policy Tool

What is happening: The Trump administration stepped up its use of U.S. economic leverage this week, intensifying pressure on both adversaries and allies through sanctions and tariffs.

As part of Operation Economic Outcast, the United States ratcheted up sanctions on Iran, targeting more than 60 entities, individuals, and vessels it views as helping the regime monetize its oil exports or procure technology and materials for its nuclear program. The administration also warned countries that facilitate trade with Iran or help it evade existing sanctions could face additional U.S. pressure, although officials stopped short of identifying specific countries, penalties, or a timeline. Iran's largest trading partners include China, the United Arab Emirates, and Turkey, with China purchasing the majority of Iranian oil exports. Beijing has already indicated it could respond in kind if the U.S. imposes sanctions or tariffs on China or its financial institutions over their dealings with Iran.

Separately, trade tensions between the U.S. and Canada escalated after negotiations between the two allies broke down late last week. The U.S. announced plans to raise tariffs to 50% on roughly $20 billion of Canadian goods, while tariffs on automobiles and auto parts are scheduled to begin or increase on January 1, 2027. Canada responded with retaliatory tariffs on approximately $20 billion of U.S. goods, set to take effect September 8.

Why it matters: The latest actions demonstrate the Trump administration's continued willingness to use access to the U.S. economy and financial system as a foreign policy tool. In Iran's case, the goal is to further isolate the country economically and pressure Tehran to reach an agreement over its nuclear program and the Strait of Hormuz. Economic pressure, however, is a welcome alternative to renewed military action as the U.S. seeks to influence Iran’s behavior without further escalating the conflict. 

The threat of secondary sanctions could significantly broaden economic confrontation. China is the key variable in how much further U.S. economic pressure on Iran can realistically go. China purchases roughly 90% of Iran’s oil exports, meaning that materially restricting Tehran’s remaining oil revenue would ultimately require Washington to pressure Chinese buyers more aggressively. The administration has already sanctioned smaller Chinese refiners and intermediaries involved in the trade, but it has so far stopped short of targeting major Chinese banks or taking steps that would force a broader confrontation with Beijing. We do not view such an escalation as the base case: with the U.S. and China simultaneously managing a much larger trade and economic relationship, Washington appears more likely to continue targeting individual firms and Iran’s sanctions-evasion network than to risk reopening a full-scale economic conflict with China.

The renewed U.S.-Canada dispute carries somewhat different risks given the deep integration of the two economies. A prolonged trade conflict could raise prices in sectors such as autos, where supply chains routinely cross the border, although tariffs are more likely to create a one-time increase in the price level than persistently higher inflation.

For now, however, we view the latest measures primarily as negotiating leverage. Several announced tariffs will not take effect for weeks or months, leaving room for talks, and the roughly $20 billion of targeted goods in each direction remains small relative to overall bilateral trade. Markets have also grown less sensitive to tariff headlines since 2025, increasingly treating initial announcements as negotiating positions rather than final policy.

Still, the combination of sanctions, tariffs, and unresolved negotiations creates uncertainty in the economic outlook at a time when policymakers are already confronting inflation and bond yields that remain higher than desired. We do not view either development as likely to alter the broader economic trajectory, but they are worth monitoring as sources of incremental volatility in the weeks and months ahead.

Latest Data on Private Credit Suggest Stability but with Stress in Select Areas

What is happening: Private credit default rates have come down from recent peaks and remain below levels historically experienced in stressed markets, although they are off their zero-rate-environment lows. Reported defaults range from below 2% to around 6%, varying by covered universe and measurement methodology (defaults may include not only non-accruals but also proactive debt restructurings and conversions to paid-in-kind from cash-pay interest). Interest coverage ratios have been trending upward for the past two years, as most companies continue to grow while interest costs remain steady because interest rates have been unchanged (private credit is typically floating rate, with base rates effectively tied to the fed funds rate).   

Stress appears concentrated in certain pockets rather than systematic. Smaller borrowers (e.g., $25 million or less in operating earnings) have had higher defaults than larger ones. Loans that financed 2021- and 2022-vintage buyouts are the most prominent offender: in one dataset, they account for 70% of troubled loans. These vintages were underwritten at peak valuations, high leverage levels, and looser underwriting standards. When interest rates subsequently rose, these borrowers had little time to grow into their new cost of capital. Healthy, growing companies have been able to manage their debt burdens and grow into their capital structures. Interest-rate declines in 2024 and 2025 have helped ease debt burdens, but companies underwritten to overly aggressive capital structures and/or growing below expectations have struggled to navigate a more volatile macro backdrop with a higher debt burden that increases vulnerability to unanticipated setbacks. 

The software sector has so far experienced similar or lower default rates than the overall universe. For instance, Fitch recorded a 1.2% default rate in the sector for the 12 months ending in July 2026. Some software credits have repriced, largely on concerns about longer-term disruption rather than on today’s metrics. Those with 50% or more loan-to-value ratios have repriced down to 87% of par on average, compared to 99% of par for those with lower than 35% loan-to-value. 

Why it matters: For private credit investors, what ultimately matters is the performance of their funds. Because each fund’s composition differs meaningfully from the aggregate market, their performance will differ, too. Among traded business development companies (BDCs), for example, non-accruals range from less than 1% to 7% (figures would be higher if restructurings and paid-in-kind conversions were included as defaults). In the BDC fund that Bessemer has made available to clients, non-accruals represent 1% of the portfolio at cost.

For the broader market, a key question is whether private credit poses a systemic risk to the broader credit ecosystem. We do not see this as a significant risk at this time. 

We anticipate defaults to remain range-bound as long as the economy is growing, interest rates remain range-bound, and companies, in aggregate, continue to grow (historically, credit default cycles have been related to macro cycles). A macro downturn or a new rate hike cycle would be key risks to our outlook. Sector-specific shocks can drive stress if the sector is large enough; software, with an estimated 20%-25% of private credit loans, is an area to watch closely. 

However, even if private credit defaults were to rise, the market’s size, fund-level leverage levels, and liquidity terms should limit spillover to the broader ecosystem. Private corporate direct lending is less than 10% the size of the global public corporate bond market. Private credit funds also account for less than 2% of bank loan borrowing, limiting the impact of potential defaults on the health of bank balance sheets. This borrowing is also moderate relative to the size of private credit portfolios: private credit funds are near or below 1x leverage in aggregate today. At 1x leverage, the fund’s assets would have to lose half of their value before the fund’s lender sees losses. In contrast, the worst annual loss over the past 20 years reported for middle-market private loans was 7% during the Global Financial Crisis. Defaults also do not translate one-for-one to losses: recovery rates in defaulted loans have historically averaged 60%-75%. 

Liquidity-driven stress should be mitigated by fund redemption terms. The vast majority of private credit is in vehicle structures that provide liquidity at the manager’s discretion, held by investors with a long-term horizon with assets matched to liabilities. Non-traded BDCs, which are facing redemption pressures, are a relatively small part of the market, and have the flexibility to limit redemptions. Traded BDCs offer ongoing liquidity, but fund interests are bought and sold among investors (hence avoiding liquidity pressures on the underlying loans). 

For investors in the asset class, vehicle structures and manager selection will be the differentiators in outcomes.