The hardest part of watching private credit break is that you are not supposed to be able to watch it.
There are no public quotes. Books are self-marked. Liquidity is gated by design. Investors are told the product is “lower volatility” because the price does not move every day. That is not lower volatility. That is a missing ticker. You are flying on in…
On August 19th the Treasury announced it would increase the size of its nominal long-end liquidity support buybacks beginning September 9. The long end yields declined on the headline. Cue the usual chorus of X hot takes: stealth QE, yield-curve control lite, money printing etc. The reality is much less bombastic…it is mostly a jawboning exercise.
The Treasury Is Not the Fed…The Treasury Cannot Create Money
Buybacks of this type are a recycling operation. You issue more bills and notes on the front end and you take some longer paper off the street. You can tidy up liquidity in off-the-run issues. You can send a signal that you would prefer the 30-year not print a fresh multi-decade highs on a Tuesday. What you cannot do is print reserves, expand the monetary base, or run a proper balance sheet policy the way the Federal Reserve can. Confusing the two is how people talk themselves into thinking a few billion of “liquidity support” is 2020 all over again.
The size tells the story. Coupon supply at the long end is still large. Doubling a buyback program that was already small relative to annual issuance is, at best, a band-aid. Markets gave it a day. Then they remembered the calendar. The signal from Bessent is not nothing but it is not as big as it seems in the broader picture.
Who is actually in charge of the long end of the yield curve? It is not the Fed. It is not Scott Bessent’s operations desk. It is priced by growth expectations and inflation expectations or said differently the boom/bust cycle. Who is in charge of that? The laws of nature and God.
Bessent Will Get Lower Yields…He Won’t Like Why
Bessent will get lower long end yields eventually, however he won’t like the reasons why. That is not a shot at the man. It is a description of the cycle. You can rearrange the maturity mix. You can jawbone fiscal consolidation. You can tell reporters that yields do not reflect fundamentals. None of that overrides a growth scare once the growth scare arrives. That reality is not what Bessent or Trump want to manifest especially before the midterm elections. Look at China if you want the preview: bond yields collapsing because the economy is in a disinflationary grind, not because Beijing discovered a clever buyback program.
Three Pillars of Risk: Growth Scare Ahead
At Phinance Technologies we put our US economic outlook on paper in January. An Emerging slowdown with yields set to drop starting in 2026. A deflationary scare is on the horizon. The risks outlined below are not exotic. They are the white swans sitting on the lawn.
Housing: Roughly 20% of GDP. Forty percent of CPI when you let the shelter component speak. Home prices still too high…call it 30% on our work. New home data has been ugly for months. Builders talking about persistent headwinds with high rates, affordability and cautious buyers. The border closing removed a bid that was quietly holding up rents and prices in a lot of metros. That floor is unwinding slowly, which is how housing always dies…not a bang…a rollover. Southeast first, then the map fills in. A frozen housing market is a frozen chunk of the real economy whether the S&P is making a high or not.
The AI bubble peaking: In my post on July 23rd I outlined that the AI Capex party was approaching closing time. First the private credit market is undergoing flow issues and credit stress making financing more expensive. Since that post Nvidia confirmed those issues on their recent earnings call by disclosing that their balance sheet exploded with extra commitments to suppliers and sweeter payment terms to their customers. They want to become a bank to their customers much like Lucent did in the dotcom days, which did not end well for Lucent. Second Enterprise demand is cracking with ROI skepticism and token pricing backlash. Third power constraints are hitting hard with the grid needing massive additional supply that won’t be ready in time for the proposed amount of datacenter projects announced. Finally there is open-source pricing pressure as many users are embracing cheaper models. They call them capex cycles for a reason. The order book always gets inflated near the top, credit is always the disciplinarian.
China entering acute phase of crisis: Factory of the world with fixed-asset investment falling, construction in contraction, real estate still working off a multi-year start collapse, and demographics that do not bottom until 2032. Contagion does not need a press conference. It eventually shows up in Asian supply chains, commodity demand, and the global credit impulse decelerating.
Bottom Line
Put those three looming risks on the table at the same time and Bessent will get lower long-end US yields. This is currently not consensus thinking but as the risks manifest themselves and the business cycle exerts its natural downturn the narrative will quickly change. The US long bond is the scoreboard and we believe soon it will begin to respond to these headwinds as we roll through the rest of the year and into the next. In hindsight the current Bessent intervention will be seen as ironic.
The Treasury is not the Fed. The Fed is not the long end. The long end is the cycle.
The signs are not hiding. They are just inconvenient for the people who need the narratives to keep the party going.
I am authoring this article to simply explain the link between Mark Walters, Guggenheim, private credit, private equity and insurance companies. Many of you may have seen the recent headlines regarding an individual by the name of Mark Walters who is the CEO of Guggenheim and his sports Empire having to be sold to meet what is best described as a regulatory margin call. Essentially Mark Walter’s insurers lent more than $20 billion of policyholder money to entities tied to his own empire without properly disclosing the affiliations. Regulators and federal prosecutors now want that exposure cleaned up. That is why he is scrambling for roughly $20 billion in liquidity.
Background
Walter, CEO of Guggenheim Partners and controlling owner of the Dodgers (and until recently the Lakers), runs two Delaware life insurers, Delaware Life and Clear Spring, through his holding company TWG Global. Those insurers took in premiums from policyholders and annuity buyers. Instead of investing the bulk of that capital in plain vanilla public bonds, substantial portions were funneled into private credit style loans that ultimately supported other Walter linked businesses. An internal review triggered by grand jury subpoenas found the related party total had been massively under reported. What had been disclosed as roughly $1 to $1.4 billion (about 3% of the portfolio) jumped to more than $17 to $20 billion across the two carriers, pushing affiliated assets to as high as 40% of invested assets.
Insurance rules allow related party lending, but they demand disclosure so state regulators can judge whether the owner’s interests are being put ahead of the people whose money is at risk. The nondisclosure is what garnered the attention of the authorities. Walter has not been charged with any crime. The companies say they are cooperating and that executives did not realize the loans were affiliated. The practical result is the same in that the insurers must reduce their concentration. TWG is buying up to $6.5 billion of the affiliated assets from Delaware Life and swapping them into unaffiliated paper. Smaller reductions are happening at Clear Spring. To fund the cleanup and avoid rating pressure that would scare off new policy sales, Walter has already sold the Lakers stake and explored other asset sales and bridge financing. That is the $20 billion problem in plain English.
Broader Implications
This is not an isolated mess. It is a window into a much larger structure that has been growing quietly for more than a decade. Private equity and private credit firms discovered that life insurance and annuity balance sheets are the perfect permanent capital vehicle. Policyholders hand over long-duration money. The sponsor invests it in higher yielding private loans and structured credit, often originated by affiliates of the same firm, and keeps the spread (fees). The model pioneered by Apollo/Athene has been copied by KKR/Global Atlantic, Blackstone, Brookfield, and others. Guggenheim and Walter were early movers in the same direction. The good news is that disclosures by these other firms do not appear to have Mark Walter type issues. The risk now is that state insurance regulators take a second look at these structures and tighten the screws.
Current Estimated Breakdown of Private Equity Insurance Ownership & Assets
· Affiliated investments by Private Equity backed insurers alone have climbed past $370 billion.
The conflicts are structural. When the same group owns both the insurer and the private credit originator, the incentive is to deploy policyholder capital into the sponsor’s own deals, keep marks optimistic, and avoid problematic questions when a borrower hits trouble. Liquidity is limited and valuation is model driven rather than market driven. If stress arrives, the first people who can lose are the policyholders whose claims depend on those assets performing. State insurance regulators are not built to police multi-layered private credit webs that run through Cayman or Bermuda vehicles. Federal prosecutors looking at Walter’s structure are now asking the questions the state system largely missed.
Bottomline
The insurance piggy bank that funded a large slice of the private credit boom of the last decade is finally under the spotlight. Walter’s regulatory margin call is the first high profile example and will likely cause state insurance regulators to reassess the status quo. When the permanent capital that underwrote the expansion of private markets starts to face real scrutiny over conflicts and concentration, the feedback loop will run both ways with tighter capital for the alternative managers and higher risk awareness for the people who thought they were buying simple life insurance and annuities. Private credit is experiencing its first real stress test as defaults have been rising and we will see how the industry manages this challenge. The Byzantine nexus of private equity, private credit and insurance companies is starting to become more understood by the investment community.
“The Lord detests dishonest scales, but accurate weights find favor with him.” Proverbs 11:1
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