KBRA Financial Intelligence

3 Things in Credit: Policy Guardrails, Private Credit As Shock Absorber, Canada and Mexico

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

So, it’s Masters week (I assume most of you are aware of golf’s first major on the calendar), and, as a result, I really don’t care for the market volatility we’ve had that has gotten in the way. But I did find it amusing that the president described tumult in the bond market this week—and I mean serious tumult—as being a bit “yippy.” That, of course, is a technical term in golf, where some poor individual agonizes every time he or she is faced with making what is by all accounts a relatively easy, short putt. That person suffers from the “yips.” Someone who gets “yippy.” Notwithstanding the pause, I think the markets are still yippy.

This week, our 3 Things are:

1. Policy guardrails. They turned up this week to do what they’re supposed to do.

2. Credit shock absorber. The presence of private credit, in scale, is a welcome development in stressed markets.

3. Canada and Mexico. Our head of sovereign ratings, Joan Feldbaum-Vidra, provides some much-needed perspective on the fate.

Alright, let’s dig a bit deeper.

Policy guardrails.

At the risk of stating the obvious, credit markets work best when there is stability. When debt issuers and investors get on the same page with regard to the economy (that drives the risk premia) and fiscal and monetary policies (those drive the risk-free rate). With regard to policymakers—The White House, Congress, the Fed—we look to guardrails to curb or soften the most aggressive policy leanings, especially if there is an ideologically driven agenda present. Separation of powers, the media, and markets all play a role in creating stability.

It took a while, but this week, we saw evidence of all important guardrails check the new administration’s surprising and ever-changing tariff policy—something that was far greater in magnitude and scope, and far more chaotic in its deployment, than what the markets had expected. It was becoming clear that businesses, hampered by uncertainty, were joining consumers, investors, and global allies in experiencing a loss of confidence in the administration’s policy design and rollout. Stock markets and Treasury markets tanked, something where there was little ambiguity, or comfort, in the message that paired trade was sending.

Meanwhile, cracks began to present in the president’s formidable solidarity among the Republican party, with Senator Ted Cruz warning that tariffs threatened a GOP “bloodbath” in 2026’s midterm elections if the administration didn’t change course in trade policy. Soon after, seven Republican senators signed on to a bipartisan bill requiring Congressional approval of tariffs. Then, we saw business leaders rise up and call for change, including major GOP donors Ken Griffin of Citadel and Pershing Square’s Bill Ackman. J.P. Morgan Chase’s CEO Jamie Dimon said recession is a “likely outcome” of the administration’s trade policy, while BlackRock’s Larry Fink said most CEOs he had talked to believed the U.S. was in recession. Oaktree’s Howard Marks said the policy was the biggest change in the environment that he had seen in 56 years of investing. The chorus was growing.

It took a while, but those guardrails—the Treasury market, the stock markets, business leaders, and Republican party leaders—worked to buy time and give the administration a chance to refine its trade policy. For now, credit investors are better off as a result.

Alright, on to our second Thing—Private credit as shock absorber.

The new administration’s tariff shock got us thinking. Equity markets were plummeting, check. Treasury markets selling off hard, check. Uncertainty spiking, check. An article on Bloomberg caught my eye, “Private Credit Swoops In as Volatility Rattles Banks’ Debt Deals.” Part of this movie we’ve seen before. Syndicated buyout loan deals hung, caught up in a market dislocation. Enter private credit.

Now, no one expects private credit to ride to the rescue of every struggling deal, and we certainly wouldn’t be looking for a nice tight bid-ask resolution. But we have long believed that private credit, in scale, is a better shock absorber in dislocating markets than what used to be in place, namely, large global banks.

Think back to the GFC. Those banks were loaded with risk and, in comparison to today, thinly capitalized. They also were heavily regulated. When sentiment shifted and liquidity dried up, the banks ceded control of their balance sheets to regulators, who were incentivized to write distressing loans and securities down hard. Asset prices fell off a cliff, and a downturn turned into a crisis.

Today, much of that risk has been pushed out into private markets, diffused among a thousand institutional investors around the world. Moreover, according to research, direct lenders have some $433 billion in dry powder to deploy opportunistically. Quite a different story from the banks circa 2008.

We’re not naive enough to believe that private credit is going to smooth every zig and zag in a stressed market. But we do believe that it does represent a better shock absorber than regulated banks. And when push comes to shove, that’s always welcome to credit investors.

On to our third Thing—Canada and Mexico.

For this topic, no better person to speak to than KBRA’s own Joan Feldbaum-Vidra. Joan is senior managing director and head of our sovereign ratings group.

Van: Joan, welcome to the podcast! We’ve had many conversations over the years about global trade and globalization. And now, well, this is your moment! Give us your thoughts on how we’ve gotten here. I think we can skip discussion on Heard and McDonald Islands. Talk to me about China, Mexico, and Canada.

Joan Feldbaum-Vidra: Those three countries were always going to be very likely targets because of two primary reasons. First, they are the biggest sources of the U.S. trade deficit. Second, because the issues surrounding the tariffs are more complicated that just “fair trade” or commerce. On the first point, China, Mexico, and Canada are by far the largest trading partners to the U.S. China’s share going to the U.S. has receded, but it’s presently number one, and even larger if you think about all of the trade diversion through Vietnam. Trade is incentivized on the building blocks of comparative advantage. And clearly, labor-intensive production is better placed to be conducted outside of the U.S.—that’s why it’s migrated to areas as such to China and Mexico. As for Canada, energy is a huge part of the trade basket with the U.S. Trump wants that dependence to shrink organically through greater investment in energy production on our soil.

Now, for the second reason, it ain’t just about trade! This relates mostly to Mexico but also Canada. Cracking down on illegal immigration and decimating the drug trade are also key policy priorities of the administration. For Mexico, immigration is less a Mexican problem and more of a Central American spigot problem—so, it’s easier to crack down. Mexico has also proven itself on fentanyl. For some reason, Trump has it in his mind Canada is part of the problem on both those fronts too. Not sure it can deliver as easily, because I am not sure it’s such a problem. Guess we will find out.

Van: So, then how punitive are the tariffs on Mexico and Canada? No need to comment on China. We are all watching that as the story continues to build.

Joan: To be honest, with all of the carveouts for the tariffs: relatively speaking, for Mexico (specifically Latin America) and Canada, the impacts may be less severe that what at first seemed to be likely. Again, relatively speaking—although depending upon how tariffs evolve for the rest of the world (which has now just been standardized at 10% and delayed for 90 days)—there’s some relative strength. Overwhelmingly, the U.S. trade balance deficit stems from the auto sector—cars and also parts, remember (which there’s no delay on or reduction). Let me quickly review what these carveouts are.

• For the 25% tariff on the auto sector (which again does not fall under the fortnight tariff announcement)—it is only applicable to non-USMCA countries. Trump also gave USMCA countries a one-month reprieve.

• USMCA-compliant goods are not subject to tariffs where rule of origin puts production in the U.S. With about 50% of all autos involving supply chain production, that’s a significant carveout. The USMCA threshold is 75% labor and content in North America.

• There is a commodity carveout, which is constructive for Latin America, including Columbia, Chile, and Mexican oil. The tariffs on energy are set at 10%, lower than the 25% threshold initially announced. That helps Canada too.

My bottom line: It looks to me like Trump is honoring in good part the USMCA. It’s up for review next year, so perhaps this is a harbinger of an easy negotiation. We shall see.

Van: So, what’s your general takeaway—are they out of the woods?

Joan: No way. My comments indicate that perhaps Canada and Mexico are relatively better positioned than some, but there is an external shock, no doubt. And negotiations and retaliation are big unknowns on what that may bring. Plus, it’s a very fluid situation with the rule book being rewritten on a daily basis. A global slowdown will hurt all. A slowing U.S. will especially hurt USMCA countries. And remember, Mexico not only is subject to an external shock, but a domestically driven shock as well, with a policy environment that hasn’t allowed Mexico to achieve its full FDI potential. Again, relatively speaking, I think they are well positioned. But there will be some pain.

Van: Thanks, Joan!

So, there you have it, 3 Things in Credit:

1. Policy guardrails. Turns out there are meaningful checks on the administration.

2. Credit shock absorber. The presence of private credit, in scale, is a welcome development in stressed markets.

3. Canada and Mexico. Thanks to Joan Feldbaum-Vidra, who reminds us that it’s not all about China. Canada and Mexico matter.

As always, thanks for joining. We’ll see you next week.