Oil Shock Revives Inflation Fears as Private Credit Cycle Looms

Why it matters

Oil above $100 doesn't just hurt consumers at the pump — it reprices inflation expectations across the entire economy, directly constraining the Fed's ability to cut rates into an emerging credit cycle that has $1.8 trillion in largely illiquid, lightly scrutinized private loans at its center.

The big picture

The 10-year Treasury yield has climbed from 4.0% to 4.3% since the Iran war began — the opposite of the flight-to-safety move that normally accompanies geopolitical shock. Investors are selling both stocks and bonds simultaneously, a signal that inflation risk is being repriced in real time. The S&P 500 is down 4% year-to-date, NASDAQ is down 5%, and the Fed now faces a stagflationary trap: cut rates to cushion a credit cycle, or hold them to contain oil-driven inflation.

Key details

• Oil's second-order effects are already visible. The Green Markets North American fertilizer price index has surged from $700 to $1,000 per short ton since the war began — a 43% increase — driven by energy-intensive fertilizer production costs. Airlines are preparing to raise fares to offset jet fuel costs ahead of the summer travel season.

• Private credit has grown from $300 billion to $1.8 trillion in a decade, with the majority of direct lending — 80% — financing private equity buyouts. That concentration matters: when the credit cycle turns, losses historically surface in the asset class that grew the most. Subprime mortgages in 2008. Private credit now.

• Software exposure is the specific fault line. Estimates suggest 25% of all direct lending loans are to software companies acquired by private equity between 2018 and 2022 — at elevated valuations, with low interest rates. Approximately 11% of those loans need refinancing in 2027, another 20% in 2028, at rates materially higher than their origination terms. AI disruption is simultaneously compressing software business models, raising the question of who refinances these loans at all.

• Redemption stress is already breaking containment. Blackstone's $82 billion BCRED fund received a 7.9% quarterly redemption notice against a 5% cap — Blackstone raised the cap to 7% and funded the remaining $400 million itself. Cliffwater's $33 billion corporate lending fund received a 14% redemption notice and honored only half. Morgan Stanley's Northhaven fund received 10.9% and honored 5%. BlackRock's $26 billion Hende fund received 9.3% and honored 5%. The pattern is consistent: retail investors want out faster than the funds can accommodate.

• JP Morgan moved first on software markdowns. The bank has marked down software company loans held by private credit funds and begun restricting its own lending to the sector — while, Eisman notes, those same loans are likely still carried at par on most private credit fund balance sheets. That valuation gap is the next shoe.

What they said

"Most of the software businesses that were bought from 2018 to 2022 are lower quality than the larger companies and were trading at a much higher valuation — and so I am concerned about many of those taken private companies."

— John Zito, Co-President of Apollo Asset Management, speaking off the record at a UBS client event, as reported by The Wall Street Journal. Apollo carries roughly 2% software exposure versus an industry average of 25% — a position that makes Zito's candor considerably easier.

"There is no doubt in my mind that a credit cycle is emerging. How bad it will be and who will experience losses is as yet unknown."

— Steve Eisman, portfolio manager and host of The Real Eisman Playbook

The bottom line

Watch the gap between JP Morgan's software loan markdowns and the valuations private credit funds continue to carry on their books — when that gap closes, it won't close quietly. And watch oil: every week the Strait of Hormuz stays disrupted is another week the Fed's rate-cut optionality erodes, leaving a $1.8 trillion private credit market to navigate its first real stress test without a monetary policy safety net.

Bias flag

Steve Eisman is a professional investor who may hold positions in securities discussed, including potential short positions in private credit-adjacent equities. His framing is analytically rigorous but not disinterested — disclosures in the podcast confirm hosts and guests may hold relevant positions. His bearish read on private credit software exposure should be weighed accordingly.