Credit Notes Absorbing Higher Yields in Leveraged Finance

Credit Strategy Research 21 September 2026 | 12:12PM EDT

Credit Notes: Absorbing Higher Yields in Leveraged Finance

The rise in global bond yields and recent central bank rate hikes have renewed credit Amanda Lynam, CPA | investors’ focus on the interest rates backdrop—specifically on the potential Goldman Sachs & Co. LLC downside risks. In the past few weeks, the 10-year US Treasury yield revisited the Shamshad Ali local highs of late 2023, surpassing the closely watched 5.0% threshold. And the | 30-year US Treasury yield climbed to nearly 5.4%—a level not seen since the summer Goldman Sachs & Co. LLC

of 2007 (Exhibit 1). In Europe, the 3.5% yield on 10-year German Bunds is the highest Sara Grut | in roughly 15 years. Goldman Sachs International

Our US economists expect another hike at the October FOMC, following the hawkish Spencer Rogers, CFA | September meeting. And our European economists forecast another 25bp rate hike Goldman Sachs & Co. LLC from the ECB in December, bringing rates into mildly restrictive territory.

Exhibit 1: A rise in bond yields across the curve has refocused credit investors on downside risks Select key US interest rates: Federal Funds Rate (upper bound) and the mid yield-to-maturity of the on-the-run 2-year, 5-year, 10-year and 30-year US Treasuries

% Fed Funds (upper bound) 2-year 5-year 10-year 30-year 8

Note: As of September 20, 2026.

Source: Bloomberg, Goldman Sachs Global Investment Research

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Debt service costs are likely more relevant vs. business model pressures, in our view While interest rate considerations are a standard part of credit investors’ relative value calculus—as there is a direct impact on total returns, the widely-discussed ‘yield-based demand,’ and debt service costs—we sense that the tone of the focus has shifted in a more negative direction, especially as it relates to fundamental risks facing floating rate borrowers.

There are two key channels of fundamental impact for this cohort, in our view. First is on the debt service cost, as floating rate borrowers will experience a headwind in the form of higher interest costs immediately, while the fixed rate borrowers will experience higher interest costs only if/when they refinance their lower-coupon debt.

Second is the impact on specific business models. The increase in interest rates may weigh on consumer demand in interest rate sensitive areas of the economy, where financing is a key ingredient to purchases, such as real estate, autos, and areas of home improvement (high-priced appliances, for example). The pressure on discretionary income may be especially visible at the lower end of the income spectrum, which spends a larger share of their budget on energy costs. That said, our US economists have noted that household balance sheets are strong, and the net worth-to-disposable personal income ratio is still near its all-time high—somewhat tempering this risk.

As a result, we view the state of the economy as ‘solid enough’ to sustain a constructive backdrop for issuers in the USD leveraged finance market—at least in aggregate. More likely than broad-based disruption, we expect increased dispersion depending on the customer and category end-market focus in interest sensitive sectors.

Given that framing, for this analysis, we focus on the debt service and credit metric impacts from higher base rates to issuers in the USD leveraged loan and private credit markets.

The key takeaway: Expect fundamental improvement to stall somewhat; focus more on the drivers of higher rates We believe the fundamental improvements visible over the past several quarters are likely to stall somewhat from here for issuers in the broadly syndicated leveraged loan and private credit markets, given the incremental rise in the policy rate anticipated (and delivered, so far). Higher base rates are an especially unwelcome development for issuers aiming to refinance upcoming Software loan maturities. That said, given the solid state of the economy and the relatively contained…