The distinctions between banks, insurers, asset managers and public and private markets are becoming increasingly blurred. Rathbones Fixed Income Assistant Fund Manager Christie Goncalves explores this convergence and what it means for credit investors seeking to identify risk before markets do.
Before I went on maternity leave last year, everyone wanted a piece of private credit. The hunt for yield was on, spreads were grinding tighter, and the asset class was pitched as the answer to almost every investor’s problem.
When I came back to the desk in May, one of the first things I did was ask colleagues and industry friends what I’d missed. Private credit came up again, but the tone had flipped. Highly rated funding agreement-backed notes, or FABNs, historically one of the tightest and best-held pockets of investment-grade credit, had sold off, catching many investors by surprise. This was caused by flaring concerns about the health and valuation of private assets.
FABNs offer a useful example of how private-market concerns can reach public bondholders. Typically issued through special-purpose vehicles linked to US life insurers, the bonds ultimately represent exposure to a funding agreement issued by the insurer, which works sort of like an insurance contract. The proceeds from the bond sale enter the insurer’s general account and can be invested across both public and private assets, with the insurer seeking to earn a spread over its cost of funding. Although FABNs trade in public markets and often carry high ratings, investors are ultimately exposed to the issuing insurer’s balance sheet. Their performance therefore depends on the insurer’s capital strength and on market confidence in the quality, liquidity and valuation of the assets held in its general account.
The recent sell-offs in FABNs reflected both concerns about insurers’ private-credit exposure and technical pressure in a tightly held market with limited secondary trading, showing how questions about private assets can quickly be transmitted into publicly traded securities. At the same time, the AI and technology sell-off was weighing on the hyperscaler-heavy end of the bond market. These stories may appear separate, but both show how convergence is changing where risk sits in public credit.
FABNs illustrate this convergence clearly. Although they trade in public markets and often carry high ratings, they are ultimately obligations of the issuing insurer, and therefore sensitive to the underlying assets it holds (both private and publicly traded).
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