Public and private credit: opponents or teammates?

Barclays Private Bank examines whether public and private credit are competing or complementary allocations as US rate cuts expected for 2025 are pared back. Major US and European bond markets have received mixed signals from policymakers, central banks and economic data this year. Yields have retreated from recent highs on growth concerns and softer data, but uncertainty over the final stage of inflation moderation and over debt supply could sustain volatility in coming months.

Fed Chair Jerome Powell said the central bank was "in the mode of waiting to see" and did not need to hurry to adjust its policy stance. Barclays notes that the market has pushed expectations for cuts further out, now pricing one move at the end of 2025 and two next year. A resilient economy, a pause in inflation moderation since summer 2024, and the prospect of trade tariffs are cited as reasons policy rates are likely to stay restrictive. Barclays flags the possibility of a rate hike if inflation proves sticky, though it is not a base case. It also sees medium-term risk that US growth could be weaker than the rate market expects, supporting a defensive-to-neutral duration stance.

In Europe and the UK, rates have gradually risen again as investors prepare for fewer cuts in 2025 than previously expected. Barclays describes the February Bank of England meeting as more dovish than anticipated, with member Catherine Mann unexpectedly voting for a half-point cut. Chief Economist Huw Pill said "we cannot declare victory over inflation," and Governor Andrew Bailey described the economy as "quite static since late spring last year." Barclays sees more downside potential for UK rates over the medium term.

Public bond markets have been volatile for many months, prompting some buy-and-hold investors to turn to private credit. Private credit consists mainly of non-bank lending, typically to middle-market companies, and has broadened into areas such as infrastructure debt. Barclays cites PitchBook data showing assets under management above $1.6 trillion in 2024, and Preqin projections of $2.8 trillion by 2028.

Barclays argues that private and public debt are complementary rather than opposing. Private credit provides an illiquidity premium that has historically delivered higher yields and returns than the loan market, although the firm notes past performance is no guarantee of future results. It also provides access to issuers and market segments otherwise unavailable, and because it is not priced daily, it may reduce overall portfolio volatility. The trade-offs include reduced liquidity, potentially higher credit and idiosyncratic risk, and a spread premium that may narrow as competition increases. Barclays concludes that liquidity remains important for meeting cash flow needs, and that the key decision for investors is the right mix of private and public fixed income holdings.