The implications of declining interest rates and the emergence of private credit

Part 1: From coupon clipping to chasing yield

If you ask an investor from a previous generation to describe a bond, you’ll likely hear a simple explanation: you lend your money to a government or a corporation, they pay you a fixed amount of interest twice a year, and at maturity, you get your principal back. In the old days, investors literally “clipped coupons” from physical paper certificates and took them to the bank to collect their interest. Fixed income was synonymous with safety, predictability, and capital preservation.

As financial markets modernized in the 1970s and 1980s, the way investors accessed bonds began to shift. Instead of buying individual paper certificates, the financial industry popularized the “bond mutual fund”. In its early days, the pitch for the bond fund was simple and highly effective: it offered retail investors professional management and instant diversification across high-quality assets like U.S. Treasuries, investment-grade corporate bonds, and agency mortgage-backed securities. Riding a wave of exceptionally high interest rates alongside the adoption of 401(k) plans, the bond mutual fund industry grew from only 35 funds in 1975 to over 1000 funds by the end of the 1980s.

For a long time, the bond fund model worked well, aided by one of the greatest macroeconomic tailwinds in financial history.

If you look at a chart of the 10-year U.S. Treasury yield from 1965 to the present, you see a distinct “mountain” shape. Yields peaked in 1981 as Paul Volcker battled runaway inflation and then spent the next four decades falling steadily toward zero. For bond fund managers, falling interest rates were a golden era, as falling yields mean rising bond prices.

But as the years wore on, a structural problem emerged. By the early 2000s, that 10-year Treasury was no longer yielding 8% or 10%. It had retreated below 4%. Then, the great financial crisis elicited the largest monetary policy response in Federal Reserve history as Ben Bernanke lowered the Fed Funds rate to zero and implemented several rounds of “quantitative easing”. The “ZIRP” (Zero Interest Rate Policy) era had arrived. The 10-year Treasury yield averaged only 2% for the next decade.

This low level of interest rates created an existential crisis for the traditional bond fund. Investors had grown accustomed to a certain level of portfolio “income” to fund their spending needs. Simultaneously, bond fund managers had to figure out how to justify their expense ratios—often charging 0.50% to 1.00% annually—when safe bonds were barely yielding enough to cover the fees.

The industry’s solution was to quietly change the recipe. To maintain the illusion of high income, active bond funds had to stretch for yield by taking on incrementally more credit risk. Slowly but surely, fund managers replaced ultra-safe U.S. Treasuries with lower-tier, BBB-rated corporate bonds, and riskier, non-agency mortgage-backed securities. When that wasn’t enough, they waded into high-yield (below investment-grade) bonds, emerging market debt, and leveraged loans.

Furthermore, the lower yields enticed corporations and mortgage borrowers to extend the maturity of their borrowing. This behavior had the effect of increasing the average maturity, or “duration” , of the universe of bonds available to investors. In turn, the duration of most standard industry benchmarks increased considerably, from roughly 4.5 years in 1990 to almost 7 years in 2021. Increasing the duration of bonds in a portfolio increases the volatility of that portfolio, so investors in most bond funds that track these benchmarks became unknowingly exposed to riskier bond portfolios over time.

Since the financial crisis, investors thought they owned the same safe, boring bond mutual funds their parents owned, but the underlying portfolios had become increasingly exposed to default risk and duration risk just to manufacture the yield they expected.

At Leavell Investments, we watched this credit and duration “creep” with caution. When you sacrifice quality for yield, your bond portfolio stops acting like a shock absorber and starts acting like the stock market. Next, we will examine the extreme end of this yield-chasing phenomenon: the complex, high-fee “income” products that Wall Street currently pitches to retail investors, and why that alluring yield comes with a steep price tag.

Part 2: The Illusion of a “free lunch”: deconstructing BDCs, CEFs, and high-yield bond funds

Previously, we discussed how a decade of near-zero interest rates in the 2010s forced investors to stretch for yield. To satisfy this demand for higher yields, the financial industry began heavily marketing a specific suite of “income” products to retail investors: Business Development Companies (BDCs), Closed-End Funds (CEFs), and high-yield (junk) bond funds.

On the surface, the pitch is enticing. In a world where high-quality corporate bonds might yield 5%, these products often boast yields of 8%, 10%, or even 12%. But in the bond market, there is no such thing as a free lunch. Yield should be considered a proxy for risk, and with these retail products, the risks are often buried under layers of complexity, opacity, and exorbitant expenses.

BDCs and CEFs are essentially pooled investment vehicles that trade on an exchange. To generate those eye-popping yields, these funds frequently employ leverage—meaning they borrow money to buy more bonds. When markets are calm, this financial engineering boosts returns. But when the economy sours, leverage acts as an accelerant on the downside, potentially leading to severe capital destruction. Furthermore, these products are often incredibly expensive. Between base management fees, incentive fees (often taking 20% of the profits), and the cost of the leverage itself, the total expense ratios on some BDCs can sometimes exceed 3% to 4% annually. Retail investors may find themselves taking on equity-like risks for only marginally higher returns than traditional investment-grade bonds, while paying hedge-fund-level fees.

High-yield bond funds offer exposure to the bonds of heavily indebted companies with sub-investment-grade credit ratings. The funds are sold under the guise of diversification and “access” to a market traditionally reserved for institutional investors. But during times of economic stress, junk bonds historically decline right alongside the stock market. When the tech bubble burst in 2000, the high-yield bond index experienced a 37% drawdown over 55 months. Even worse, during the great financial crisis, high-yield bonds declined nearly 45% over 18 months. Investors are buying a fraction of the downside protection traditionally associated with fixed income, while adding some amount of equity risk disguised as a bond fund.

Wall Street loves selling these products because they are highly profitable for the managers. However, at Leavell Investments, we view them through a different lens. When you buy a complex, leveraged, and expensive income product in a calm market, you are often picking up pennies in front of a steamroller. In Part 3, we will explore how this yield-chasing phenomenon has culminated in the biggest financial trend of the 2020s: the explosion of the private credit market.

Part 3: The private credit boom: a new frontier or the same old trap?

If you have read financial news at any point over the last few years, you have undoubtedly seen the headlines about “Private Credit.” What started as a niche strategy for funding middle-market businesses after the financial crisis has ballooned into a multi-trillion-dollar global asset class in 2026.

Private credit—where non-bank lenders make direct, privately negotiated loans to companies—serves a legitimate purpose in the institutional financial ecosystem. Following the 2008 financial crisis, regulators wanted to prevent “moral hazard”—the tendency for financial institutions to take reckless risks knowing the government would bail them out. As a result, regulators imposed strict new capital requirements and rules on traditional banks. As these banks retreated from certain types of corporate lending to comply with the heavy regulatory burden, private credit firms stepped in to fill the void.

However, the current state of the private credit market should give prudent investors pause. Having saturated the institutional market (pensions, endowments), asset managers are now aggressively pushing private credit down to the retail investor level through non-traded BDCs and “interval funds.” This push has recently culminated in a massive Wall Street lobbying effort to insert private credit and other illiquid alternative assets directly into everyday 401(k) retirement plans. Framed as an effort to “democratize” access to exclusive investments, asset managers are quietly eyeing the trillions of dollars locked in employer-sponsored accounts as their next great source of fee-generating capital. They market these products as the ultimate solution: high yields, floating interest rates, and—crucially—low volatility.

But here is the catch: The low volatility is an illusion. Unlike public bonds, which are priced by the market every day, private credit loans do not trade on an exchange. Their value is determined periodically by the managers themselves (a process known as “marking to model”), sometimes with the assistance of hired consultants. Because the assets aren’t subject to the daily realities of public market sentiment, their price history looks artificially smooth.

This opacity masks underlying risks. Today’s private credit market is characterized by intense competition among lenders, which has led to fewer legal protections for investors and driven the yield on many deals below levels that would adequately compensate investors for the credit risk they are taking. Furthermore, some highly indebted private companies are struggling to make cash interest payments, opting instead for “Payment-in-Kind” (PIK) arrangements where they simply add unpaid interest to the principal loan balance.

Selling illiquid, opaque, and highly levered corporate loans to retail investors at the top of an economic cycle is a story that rarely ends well. To be clear, shifting these speculative loans out of the traditional banking system is generally a positive development. We would much rather see sophisticated, institutional investors absorb these risks than commercial banks, which rely on everyday consumer deposits and implicit federal taxpayer backstops. But marketing them to everyday retail investors is a dangerous game. It is the ultimate evolution of the yield chase we discussed in Part 1. So, how do we navigate this environment? In Part 4, we will outline Leavell Investments’ fundamentally different approach to fixed income.

Part 4: The Leavell Investments approach: preservation, simplicity, and patience

Over the course of this article, we have tracked the evolution of fixed income from simple, coupon-clipping instruments to complex, heavily marketed retail products like BDCs, CEFs, and private credit funds. We’ve highlighted the high fees, hidden leverage, and opaque risks inherent in the Wall Street “income” machine.

So, what is the alternative? How does Leavell Investments manage fixed income in a world obsessed with yield?

Our philosophy is built on three core pillars: capital preservation, simplicity/low cost, and opportunistic value.

1. Capital preservation: We believe that fixed income should serve as the anchor of your portfolio. Your wealth is built and grown through your business, your career, and your equity investments. The primary job of your bond portfolio is to ensure that, when the stock market experiences extreme volatility or the economy enters a recession, your capital is protected, and your liquidity is secure. You should not have to worry if the foundation of your portfolio is going to crack under economic pressure. Furthermore, we believe that structural changes in the financial industry should not dictate how your investments are managed. As we discussed in Part 1, over the years, the average maturity of the broad U.S. bond index has extended materially, exposing passive investors to significantly more interest rate risk. Simultaneously, the composition of the corporate bond market has shifted notably toward BBB-rated bonds—the riskiest investment-grade rating category. Rather than passively accepting these increased risks due to index changes, we actively curate our portfolios to prioritize the needs of each individual client.
2. Simplicity and low cost: We eschew the complex, the opaque, and the expensive in favor of straightforward, high-quality instruments like individual U.S. Treasuries, highly rated municipal bonds, and investment-grade corporate bonds. However, this does not mean we avoid all pooled investment vehicles. We view modern Exchange-Traded Funds (ETFs) as invaluable tools in our toolbox. Unlike old-school bond mutual funds that routinely charge 0.5% to 1.0% annually, we utilize highly targeted, transparent ETFs with expense ratios typically ranging from just 0.03% to 0.15%. These low-cost tools allow us to precisely tune the risk and return balance while adding incremental diversification to your portfolio. As a fee-only fiduciary, we avoid the incentive to sell you high-fee, proprietary products. We are focused on keeping your overall structure simple and your costs low, because every dollar saved in fees is a dollar of yield that stays in your pocket.
3. Opportunistic Value: Does this mean we never buy high-yield bonds, BDCs, or distressed debt? No. But we refrain from significant allocations to those assets when markets are calm. As Warren Buffett famously advised, “Be fearful when others are greedy, and greedy when others are fearful.” When the economy eventually stumbles, the complex, leveraged vehicles we warned about in Part 2 and Part 3 often face liquidity crises. Investors panic, and these funds are forced to sell their assets at fire-sale prices. A BDC or high-yield bond fund that traded at 100 cents on the dollar might suddenly trade at 60 cents. That is when Leavell Investments might be willing to take on this type of fixed income risk. We don’t stretch for high-yield products in a calm market; we wait patiently to buy those assets at a discount during a distressed market.

Fixed income management doesn’t need to be an opaque science. By demanding transparency, avoiding the temptation to overpay for high-yield products, and maintaining the patience to act when the market panics, we build bond portfolios designed to do exactly what they were originally intended to do: protect and serve your long-term wealth.

i Source: https://www.ici.org/system/files/attachments/per03-02.pdf
ii Source: Bloomberg Finance L.P.
iii Duration is the sensitivity of a bond’s price to changes in market yields; duration increases and decreases with maturity.
iv Source: Bloomberg Finance L.P.
v Source: Bloomberg Finance L.P. and Leavell calculations

Edward joined the firm in January 2022. Born and raised in Richmond, Virginia, Edward attended St. Christopher’s School and then the University of Virginia in Charlottesville, where he graduated with degrees in economics and psychology from the College of Arts and Sciences. Since graduation, he has worked primarily in fixed income investments, with roles ranging from distressed credit analysis to mortgage-backed securities trading. Most recently, he was responsible for actively managing the $5 billion securitized bonds portfolio at the Virginia Retirement System. Edward is a CFA® charterholder and has an MBA from the University of North Carolina Kenan-Flagler Business School. He and his wife, Anne Arden, have three young children and live in midtown Mobile. In his free time, you’ll find him with his kids in a golf cart trying to squeeze in nine holes.

Leavell’s Team-Based Approach to Client Relationships

At Leavell, we believe exceptional financial guidance begins with a collaborative approach. Every client is supported by a dedicated team that ensures personalized, comprehensive, and responsive service.

Each client team includes:

• Investment Counselor – Your primary advisor, focused on understanding your financial goals, risk tolerance, and long-term objectives. The Investment Counselor designs a customized investment strategy and holistic financial plan tailored to your unique needs.
• Portfolio Manager – Responsible for executing your investment strategy. The Portfolio Manager makes investment decisions, actively monitors market conditions, and adjusts portfolios to stay aligned with your goals.
• Client Service Representative – Delivers attentive, high-touch service. From account setup and document management to money movement and ongoing inquiries, your Client Service Representative ensures every detail is handled with care.

This team-based structure enables Leavell to provide well-rounded support and long-lasting client relationships built on trust, expertise, and continuity.

Important Disclosures: The statements and opinions expressed in this article are those of the authors as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Leavell Investment Management, Inc. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing in securities carries risk including the possible loss of principal. Individual circumstances vary. Past performance is no guarantee of future results.