Sponsors, spreads and stress testing: Navigating 2026’s rate reset

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Ben Berkey: If markets have felt harder to read lately, you're not imagining it. Over the past six months, the rate backdrop has shifted toward a world for higher for longer and more volatility. Longer term yields have climbed sharply with the US 10-year treasury reaching levels not seen since the early 2000s. Market participants are rethinking not only where policy rates may go, but also how much compensation they need to take on risk and hold longer duration assets. Rate volatility has picked up too, with the move index rising nearly 30% in September alone. But simply, financing and hedging decisions now have to account for a much wider range of outcomes. Welcome to JP Morgan's Making Sense. Today, we'll unpack what all of this means on the ground, how client behavior is changing, where sponsors and portfolio companies are finding opportunity, and what it takes to stay prepared when markets move quickly. I'm Ben Berkey, a senior vice president in our corporate derivatives franchise. Joining me today are Brian Tramontozzi, Head of North American Leverage Finance Capital Markets, and Kim Hernas, Global Head of Sponsor Private Side Sales. Brian, Kim, great to have you both here.

Brian Tramontozzi: Great to be here.

Kim Hernas: Nice to be here.

Ben Berkey: So Brian, let's start with you. What has changed most in how companies are thinking about financing?

Brian Tramontozzi: Yeah, I think the big thing that's changed year to date, uh, and really accelerating the last month and a half is base interest rates. We've seen yields in high yield increase by 100 basis points. The index has increased by 100 basis points since the beginning of September. That's a, that's a significant movement. We, we're not used to seeing moves like that in non-recessionary times. The majority of that is base treasury rates and, and there has been some spread widening. But I, I'd say the biggest change that we've experienced is just increase in yields. Similar in the term loan market, we are just experiencing now the start of a, a Fed tightening cycle. And so while absolute yields have maybe not risen as much in the loan market, I think we all expect that to catch up with the high yield market in short order.

Ben Berkey: Thank you, Brian. And Kim, on the Sponsor side, what has changed in your most recent conversations about the market with your Sponsor clients?

Kim Hernas: Yeah, so I, I think on the backdrop of the movement in rates and just overall sort of market volatility, a lot of our conversations are focused on how does that change your investment opportunities or capital allocations if you're a sponsor, but also increasingly, how does that change holding periods on investments? So we've seen, uh, a rise of evergreen vehicles, retail funds. That means that where an exit timeline might have been for an investment historically three to five years away, now it could be much, much longer. So that could change how people think about how they want to finance, uh, their fund, how they want to finance the asset, and also how they think about, uh, risk management both on the entry and the exit of investments.

Ben Berkey: Thanks for that, Kim. And then as it relates to liquidity with the Sponsor investment horizon kind of growing in, in nature, how are sponsors thinking and finding liquidity? How are they using back leverage and other tools to find liquidity in their portfolios where it otherwise may not be?

Kim Hernas: So I think part of the conversations that we've had this year and, and a change that we're seeing is that for sponsors, they're thinking about financing across the GP, the fund, and the asset, and sometimes interchangeably. So where those were three discreet conversations, we're now having more conversations on how do I unlock value with some combination of the value that I have, uh, uh, in all three of those areas across my GP balance sheet, across my fund investments, and then on an individual asset level. So you're seeing kind of more coordination, more partnership within sponsors to try to figure out how to unlock value and navigate liquidity.

Ben Berkey: And Brian, as it relates to the, the asset space, which you primarily focus in, how do you see issuers positioning across the broadly syndicated loan space, the high yield bonds and private credit?

Brian Tramontozzi: So the good news about the leverage market is we don't have a maturity wall facing us. And that's a function of 2024 through today. We've enjoyed strong liquidity. Investor cash balances have been robust. CLO creation has been strong. Mutual fund inflows have been positive. And so our issuers have taken advantage of strong market conditions to extend their runway, to reprice their debt, and really, unless a company is in financial distress today, it's likely that their maturity wall is at least three or four years out.

Ben Berkey: And as it relates to that, do you think the, the cost of capital is, is posing any resistance? You know, you mentioned treasury yields rising in the beginning of the conversation. Do you, do you find that causing any, I guess, disturbance in the markets?

Brian Tramontozzi: I think it's interesting when you look at spreads, single-B and BB spreads have held relatively constant year to date, whereas CCC spreads have increased by over 300 basis points. And what that tells me is companies with tight cash flow coverage, namely CCC-rated credits, the market is penalizing them in their trading levels for fear of economic distress either because of a slowing economy or because of tight interest coverage and cash flow coverage. So I think that's something we should watch very carefully because similar to what we saw in 2022, we're now seeing the lowest end quality names increase in yield the most, and that could be a sign of things to come.

Ben Berkey: Kim, on the sponsor side, the cost of capital conversation, which everyone navigates as it relates to new financings and refinancings, what, what have you seen in your space?

Kim Hernas: I think there's two things. One, I think there's a general desire to make sure that across the complex that risks are identified and that there's a decision around risk management. So oftentimes what you'll see, you know, maybe perhaps at the portfolio company level, there's been a lot of engagement around risk management there, but maybe less so if you look up at the fund or at the GP. So where are all of the risks or is it FX versus rates versus commodities? So where are all of the different risks that exist in the, let's call it kind of capital stack, for lack of better word, and have I really made a decision a- about those risks? Second, I would say, we've certainly seen an increase in, uh, what we'll call kind of deal contingent hedging or hedging that exists, which is very specific to either an acquisition or an exit of an asset. And so this kind of how do I protect the value that I've assumed in my models around an investment has become certainly more prevalent in the market and more top of mind.

Ben Berkey: Let's pivot to a question about teamwork. In these high pressure situations which we currently find markets confronting us with, Brian, where do teams get tripped up and what's the best way to navigate that when time is a constraint, getting a deal into market?

Brian Tramontozzi: Well, so JP Morgan, we've got almost 30% lead left market share in leverage loans and high yield bonds. And we've been the dominating force in those markets for, you know, the better part of 40 years in loans and almost 20 years in the high yield market. What allows us to stand apart is our capability and our ability to execute transactions in good times and bad times. We're so constantly in market, we just know how to get deals done, how to be smooth, how to be efficient, and how to, how to navigate through the bumps and twists and turns that naturally will happen in any situation. So I think with, with a JP Morgan, you just have experience that nobody else can bring to the table.

Ben Berkey: That makes a lot of sense. Thanks, Brian. For you, Kim, cross-asset collaboration, you span so many different products and spaces in the global sponsor community. What does the best sequencing look like when cross-asset collaboration works the best across the bank?

Kim Hernas: So Ben, to answer that question and also to pull on some of what Brian had noted, you know, one of the things that you s- clearly see as a strength of JP Morgan is the ability to assemble a team cross asset and across regions to deliver solutions. So increasingly, we're trying to move to a solution-oriented business versus an asset-class-aligned or product-aligned-business. And in doing so, you know, I think we hopefully create more value, think through different questions to ask, and also, you know, show different alternatives, right, for people to evaluate when they're coming to market. And that doesn't necessarily mean taking a lot more time.

Brian Tramontozzi: Understood. Actually, I'd like to build on something Kim just said. In leverage finance, we talk about a vineyard mindset, but we also talk about providing our customers with the financing that they need. A lot of times, companies will come to us and believe they need a financing alternative in high yield. We will show them converts. We will show them private credit. We will show them straight equity raise. Like, we are product-agnostic. The way we've set up our capital markets desk is literally to be as flat as possible. We sit on the same floor in leverage finance as converts, as common equity, as Kim and her rates team. We wanna provide our clients with exactly what they want as opposed to what we think they want based off of the capabilities that we have in whichever team is making the pitch.

Ben Berkey: So you hit on a great point there, Brian. You're talking about flexibility across the spectrum. How are clients truly balancing certainty in the financing markets versus flexibility while markets are ever-changing right now? Let's talk about certainty versus flexibility. Do you find a lot of borrowers and issuers right now are going to market so they know the devil that they do versus the devil that they don't? Or are they holding off to try to grasp at some better financing conditions that may exist in the future?

Brian Tramontozzi: So September was a record month in high-yield new issuance activity. We also saw very elevated levels in the loan market. Most of that was M&A driven. The majority of what was a $54 billion high-yield financing month was M&A-related. That's a record. And that really did take a lot of liquidity in the market, and that's part of the reason why spreads widened as much as they did in September. I believe that our issuers appreciate when market windows are open, they take advantage of those windows. And we certainly had an open window in September for those issuers to come to market. Conditions are very uncertain. We are always facing volatility. In particular, we're s- facing elevated volatility today in rates, spreads, the VIX. And I think companies that have a need to raise capital today are certainly very seriously going to market on an accelerated basis to take that risk off the table.

Ben Berkey: Thank you for that, Brian. And Kim, I'm gonna pivot over to you next. What should your clients be preparing for next and what are the best prepared sponsors actioning or thinking or asking today?

Kim Hernas: So I think ultimately, what makes for good preparation and what are some of the things that we do in our business to think about sort of good preparation? One is truly, again, assessing what we have, right? So what exists, uh, within the platform or portfolio that could create different forms of risk? How do you think about stress cases against that risk? Having a good understanding of the products that are available to address some of that risk and uncertainty, and whether you decide to use them or not, right? It's really just understanding the market and, and products have continued to evolve and are constantly evolving. And so understanding kind of the tools in your toolkit and then having intentional decision making. So I feel like the combination of those things generally make for the best preparation, you know, whether that's, uh, for the way we try to operate here, but also the way that we see some of our clients trying to tackle uncertainty in the market.

Ben Berkey: Thanks for that. And for our last question, we're gonna shift to the market outlook and what you folks think would change your market outlook as we head into the final months of 2026. So, uh, for Kim, what market move or shift in client behavior would signal a meaningful change in portfolio strategy or, or risk appetite across the sponsor universe?

Kim Hernas: I'm gonna let Brian take the sort of market outlook of view, on view on rates question, and we can look back at this, you know, in six months and see, see how he did. The things that I'm looking for in kind of cues in the market is, is deal activity, fundraising activity, the pace of exits, and the composition of those things, right? So, uh, th- those are the things that I watch kinda most closely, 'cause I think those then lead to hopefully kinda clues for us in where we can be most supportive, regardless of the market environment, right? We are trying to be responsive and thoughtful, and again, wh- whether that's across FX and if people are starting to reach more and fundraise more internationally, right? If pe - If exits are starting to look more like private versus public exits versus other types of exits. And so, again, regardless of market environment, people need to get on with their business and with their deals, and so we're trying to make sure that we're sort of at the front end of thinking through what comes next.

Ben Berkey: rian, I'll turn it over to you.

Brian Tramontozzi: Deficits are inflationary just by their nature, and so I think we're preparing to face an elevated interest rate environment for at least the near term or foreseeable future. But also, one of the things that's been allowing our market to be as strong as it is has been no recession. And a lot of that is a function of capital spend, infrastructure spend, in particular around AI and, and energy infrastructure. Any meaningful negative change to that, I think we could see spreads widen as well. So I don't think this is gonna happen, but we're certainly more cautious today than we've been in a long time about spread widening as well as higher base interest rates around, um, deficit spending as well as, um, you know, infrastructure CapEx.

Ben Berkey: Brian, Kim, I think that's a great place to wrap up. Thank you for sharing such an insightful conversation today. Markets are clearly keeping everyone on their toes. There's clearly a lot to watch a month ahead. And to everyone listening, thanks for spending time with us. We'll see you next time on Making Sense.

Voiceover: Thanks for listening to JP Morgan's Making Sense. If you've enjoyed this conversation, share your feedback by leaving a comment or review wherever you listen to podcasts and be sure to follow our channel so you don't miss an episode. This material was prepared by the investment banking group of JP Morgan Securities, LLC and/or its affiliates and not the firm's research department. It is for informational purposes only and is not intended as an offer or solicitation for the purchase, sale, or tender of any financial instrument. Copyright 2026 JP Morgan Chase & Co. All rights reserved.

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