Private credit yields more than high-yield bonds on the screen. Charge it for illiquidity, leverage and the way losses are counted, and the gap is real but far narrower than the headline.
Key takeaways
- Private credit pays a higher coupon: roughly 9% gross versus about 6.98% for public high yield in mid-2026, and a floating rate that rises with SOFR rather than a fixed one that falls in price when rates climb.
- The recovery gap is the real edge: first-lien direct loans have recovered around 54 cents on the dollar historically against roughly 40 for senior unsecured bonds, so private credit loses less when a borrower fails even though its default rate has been rising.
- Most of the yield premium is rent for illiquidity: you are locked in for years, you pay management and performance fees, and some funds add leverage. High yield gives up income in exchange for daily liquidity at index-fund cost.
- Which pays better is a question about you, not the asset: if you never need to sell, private credit’s net numbers win; if you might, the liquidity you buy with high yield is worth the lower coupon.
For years the answer looked simple. If you wanted income above what safe bonds paid and could stomach lending to weaker companies, you bought high-yield bonds, the debt once nicknamed “junk”. They traded on public exchanges, you could sell them any day, and the yield told you roughly what you were signing up for.
Then a rival showed up at scale. Private credit, and specifically direct lending, now runs to roughly $2 trillion globally by assets under management (IMF, 2024 estimate), with some counts putting it nearer $3.5 trillion once you fold in dry powder and semi-liquid vehicles. It lends privately to the same kind of companies, and its headline returns have run higher than public high yield. So the question a capital-ready investor actually asks is the one in the title: which pays better, and what does the extra income cost you?
Here is the position up front. On a straight read of the numbers, private credit has paid more, and it wins on paper on almost every line. But most of that gap is not a free lunch. It is rent you collect for locking your money up, for accepting a valuation that does not move day to day, and in many funds for adding leverage. Strip those out and the honest edge is narrower than the headline, and it comes from two structural features rather than a magic premium: floating-rate coupons and higher recoveries when a borrower fails. The reader’s usual assumption, “private credit just yields more, take it”, is where this goes wrong.
The yield on the table right now
Start with what each pays today, because that is where the reader’s eye goes first.
High-yield bonds, measured by the ICE BofA US High Yield Index, were yielding about 6.98% as of 2 July 2026 (FRED series BAMLH0A0HYM2EY). That is the all-in yield you lock in, and because most high-yield bonds carry a fixed coupon, it is close to what you would earn if nothing defaulted and rates went nowhere.
Direct lending, the largest slice of private credit, works differently. Loans are almost always floating-rate, quoted as a benchmark plus a spread. The benchmark, three-month SOFR, sat around 3.66% in early July 2026, and senior direct loans have priced at roughly SOFR plus 500 to 550 basis points, so the gross all-in coupon lands near 9%. The realised numbers back that up: the Cliffwater Direct Lending Index, tracking around 21,000 loans worth about $549 billion, delivered a 9.3% total return for calendar 2025, with interest income of 10.4% (Cliffwater, as at 31 December 2025).
So on the coupon alone, private credit pays two to three percentage points more than public high yield. That is the fact that pulls money in. It is also the fact that flatters private credit if you stop reading there.
The US market has the deepest data, which is why the numbers above lean on it, but the picture is not just a dollar one. The European high-yield market prices lower. The ICE BofA Euro High Yield Index yielded about 5.34% on 2 July 2026, roughly 1.6 points below its dollar equivalent, with an option-adjusted spread of about 2.71%. Sterling high yield sits between the two. The gap reflects different base rates and index composition, not a different asset. The core trade-off, extra income in exchange for locking your money up, is the same whether you measure it in dollars, euros or pounds.
Two things complicate it. First, high-yield spreads are unusually thin, on both sides of the Atlantic. The US index’s option-adjusted spread, the extra yield over US Treasuries, was about 2.75%, or 275 basis points, on 2 July 2026, against a long-run average north of 5% and an all-time low of 2.41% in 2007; the euro index’s 2.71% spread tells the same story. The public market is paying you little to take credit risk right now, which is part of why direct lending’s premium looks so wide. Second, that direct-lending coupon is a gross figure: fees and, in levered funds, borrowing costs come out before it reaches you.
Fixed versus floating: the structural difference that actually matters
The coupon gap is the headline. The coupon structure is the substance.
A high-yield bond pays a fixed rate. Its price moves inversely to interest rates, and the index carries an effective duration of roughly 2.9 years (iShares HYG fact sheet, as at 31 March 2026). A one-percentage-point rise in yields knocks close to 3% off the capital value before any credit event. You are taking two risks at once: the borrower’s health, and the direction of rates.
A direct loan resets. Its coupon floats with a short-term benchmark, so when short rates rise the income rises too, and the loan’s capital value barely twitches on a rate move. The benchmark is SOFR on a dollar loan, SONIA on a sterling one and EURIBOR on a euro one, but the mechanism is identical in every currency. You are left with one main risk rather than two. For an income investor who does not want to bet on central bank policy, that is a genuine advantage, and the cleanest reason the two assets are not interchangeable. When rates fall the floating coupon falls too, so it cuts both ways. But it removes the rate-driven capital swings that make public high yield lurch in a sell-off.
What happens when a borrower fails
Yield is what you are promised. Defaults and recoveries decide what you keep.
On defaults, the two are closer than reputation suggests, and the direction has recently favoured public bonds. Private credit default rates have been climbing: the Proskauer Private Credit Default Index read 2.73% for the first quarter of 2026, up from 2.46% in the fourth quarter of 2025 and under 1.8% a year earlier. High-yield bonds, on a like-for-like bond-only basis, ran at roughly 3.7% (trailing twelve months, Moody’s, September 2025), with the broader speculative-grade rate higher still. So more borrowers default in public high yield than in the direct-lending indices, though the private figure is rising and its samples are younger and less battle-tested.
Recoveries are where private credit earns its keep. Because a direct lender is often the only lender, or one of a small club, it sits at the top of the capital stack with tight covenants and a direct line to management. First-lien direct loans have historically recovered around 54 cents on the dollar (KBRA DLD, 2024, on a small sample). Senior unsecured high-yield bonds, where you are one creditor among many with looser terms, have averaged closer to 40 cents over the long run (Moody’s). That recovery gap, not the coupon, is the durable structural edge. A loss on a defaulted direct loan is smaller than a loss on a defaulted bond, which is why a modestly higher default rate does not automatically mean higher net losses.
Here is the arithmetic that turns those two numbers into a return, the computation the coupon-gap headline skips. Private credit at a 2.7% default rate and 54% recovery has a loss given default of 46%, so annual credit losses run about 2.7% times 46%, roughly 1.2% off the coupon. High yield at a 3.7% default rate and 40% recovery has a loss given default of 60%, so about 3.7% times 60%, roughly 2.2% off the coupon. Private credit defaults a little less in these indices and loses less when it does, so it gives back less of its yield to bad debt.
The price of admission
None of the above is free. This is the part of the comparison the yield table hides, and it is where the reader’s “just take the higher yield” instinct meets the bill.
Liquidity. A high-yield bond is a public security you can sell any day the market is open. A private loan is not. Investors are typically locked in for years, and even semi-liquid vehicles ration withdrawals when everyone wants out at once. A good chunk of the extra yield is simply the rent you are paid for giving up the exit: worth having if you genuinely do not need the money back, worth nothing if you do.
Fees. Public high-yield exposure can be bought through an index fund for a handful of basis points. Private credit funds charge management fees plus, often, a share of the profits, and those come out of the gross coupon before you see a penny. The 9.3% the Cliffwater index reported is closer to a gross benchmark than a net-in-your-pocket number; what an individual fund delivers after its own fees can be meaningfully lower.
Access and leverage. High-yield funds take small minimums. Private credit has historically wanted large ones, though a new set of wrappers is lowering that door, and the wrapper you meet depends on where you are. In the US it is mostly private credit ETFs and interval funds. In the UK it is the Long-Term Asset Fund (LTAF), built to hold illiquid assets inside pensions. Across the EU it is the European Long-Term Investment Fund (ELTIF), reformed in 2024 to open the asset class to retail money, alongside UCITS funds that hold liquid credit rather than the loans themselves. The names differ; all trade some of the illiquidity premium for easier access. Many private credit vehicles also use leverage to lift returns, which raises the yield and the risk together. Leverage is invisible in the headline coupon; it shows up in a downturn.
The smoothing question. Private credit reports lower volatility and better risk-adjusted returns than public high yield, with Sharpe ratios well above those of high-yield bonds and leveraged loans over the past two decades. Some of that steadiness is real. But some is an artefact of the accounting: private loans are valued by appraisal, quarterly, not by a live market, so the reported price simply moves less than a traded bond’s. A comparison that quotes the Sharpe ratio without this caveat is selling you the smoothing as if it were safety. It is partly real and partly a chart artefact, and an honest reader should discount it.
The assembled comparison
The whole picture sits in one place below, built from the sources cited above rather than from a single provider’s marketing. Treat the yields and default figures as point-in-time (mid-2026); the recovery figures are long-run historical averages, not current-quarter reads.
| Feature | Private credit (direct lending) | High-yield bonds |
|---|---|---|
| All-in yield / coupon | ~9% gross (SOFR + ~500-550bp); CDLI income return 10.4% in 2025 | ~6.98% (2 Jul 2026) |
| Rate structure | Floating (resets with SOFR) | Fixed (~2.9yr duration) |
| Spread over benchmark | ~500-550bp over SOFR | ~275bp OAS over Treasuries |
| Default rate (recent) | ~2.7% (Q1 2026) | ~3.7% bond-only (TTM, Sep 2025) |
| Recovery rate (historical) | ~54% first-lien | ~40% senior unsecured |
| Implied annual credit loss | ~1.2% (2.7% x 46% LGD) | ~2.2% (3.7% x 60% LGD) |
| Liquidity | Illiquid, multi-year lock-up | Daily, exchange-traded |
| Fees | Management + performance | Index fund, single basis points |
| Minimum investment | High (ETFs/interval funds lowering it) | Low |
| Reported volatility | Lower (partly appraisal-smoothed) | Higher, marked to market |
Sources for each figure are cited inline above and listed in full below. The credit-loss row is our own calculation from the default and recovery figures, not a published statistic, and it assumes the indices’ averages hold, which they will not in every year.
So which pays better?
Read the table honestly and the verdict is not “private credit, obviously”. It is more useful than that.
Private credit has paid more, and the reasons hold up: a higher coupon, a floating structure that carries you when rates rise, fewer defaults in the indices, and far better recoveries when a borrower fails. On a net-loss basis, the maths favours it. If you can genuinely lock money away for years and are buying a fund whose fees and leverage you understand, the extra income is real income, not just compensation for a risk you have quietly taken on.
But the edge is smaller than the coupon gap suggests, and much of what looks like outperformance is payment for illiquidity plus the calming effect of appraisal-based pricing. High-yield bonds pay less, yet they hand you something private credit cannot: the ability to change your mind on any trading day, at a price the market sets in the open, for a few basis points in fees. When public spreads are as tight as they are now, that liquidity is worth more than usual.
So drop the assumption that this is a yield contest with one winner. It is a trade between income and access. Private credit pays you to wait; high yield pays you to stay liquid. Which pays *better* depends entirely on whether you were ever going to need the exit.
FAQs
Does private credit really yield more than high-yield bonds?
On the current data, yes. Direct lending has been paying a gross coupon near 9%, helped by a floating rate over SOFR, against about 6.98% for the ICE BofA US High Yield Index in early July 2026. But the gross private-credit figure is before fund fees, and part of the gap is payment for locking your money up rather than pure extra return.
Is private credit safer than high-yield bonds?
Not straightforwardly. Its default rates have been lower in the main indices and its recoveries higher, which points to smaller net credit losses. But its lower reported volatility is partly an artefact of quarterly appraisal pricing, not a live market, and its illiquidity is a real risk that does not show up in a yield figure. Safer on losses, riskier on access.
Why do high-yield bonds fall in value when interest rates rise?
Because most carry a fixed coupon. When market rates rise, a bond paying a fixed rate becomes less attractive, so its price falls to lift its effective yield. The high-yield index’s roughly 2.9-year duration means a one-point rise in yields costs close to 3% of capital. Floating-rate private loans largely avoid this because their coupons reset.
Can ordinary investors access private credit?
Increasingly, yes, and the route depends on where you are. It was historically gated behind high minimums, but a wave of retail wrappers now offers a lower-minimum way in: private credit ETFs and interval funds in the US, the Long-Term Asset Fund (LTAF) in the UK, and the European Long-Term Investment Fund (ELTIF) across the EU. Each trades some of the illiquidity premium that made the asset attractive for easier access.
Which should I choose, private credit or high-yield bonds?
That depends on your own need for liquidity and is a decision for you and a qualified adviser, not something this analysis can answer for you. The framework is straightforward: private credit pays you to wait, high yield pays you to stay liquid. This is general information, not financial advice.
Next read
- Private credit: our core guide to how the asset class works, who lends, and how to get access.
- What is direct lending?: the largest slice of private credit, explained.
- Private credit default rates: what the data actually shows: a closer look at the default numbers behind this comparison.
- Private credit vs public credit: the wider public-versus-private framing beyond high-yield bonds.