BofA Hartnett: "Private credit crisis" is a "leading indicator"

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Technical signals in the private credit market are flashing warnings.

Michael Hartnett, Chief Investment Strategist at Bank of America, stated in his latest Flow Show report: Bank loan funds, as the "vanguard" of the financing chain, have historically served as a leading indicator for risk events when they break below key levels. Currently, two key indicators have both fallen below warning thresholds: SRLN Senior Loan ETF closed at $39.89, losing the critical support of $40; the financial sector ETF XLF reported $51.43, falling below the $52 mark.

Hartnett previously made it clear that once both of these levels are breached at the same time, it signals that credit risk is starting to transmit to the financial system, triggering the "full flush" risk asset sell-off condition he has warned about, and potentially leading to systemic selling.

SRLN tracks bank loans, i.e., floating-rate loans issued by financial institutions to corporations, situated at the front end of the financing chain and highly sensitive to marginal changes in credit risk. XLF covers the U.S. financial sector, including banks, investment banks, and asset management institutions—it is the “connector” between the credit market and the capital market. Hartnett sees both indicators as dual probes for monitoring the health of the financial system: one focuses on credit itself, the other on the transmission hub of credit.

In his view, such shocks will be priced into the market through two pathways: first, a sharp strengthening of the U.S. dollar. When risk assets are sold off, capital tends to flow back to the U.S. for safety, boosting the exchange rate of the dollar. He expects the DXY dollar index could rise to the 100 mark, which will further tighten global financial conditions and put pressure on emerging markets and commodities. Second, a significant rally in long-dated bonds. Funds will simultaneously pour into the Treasury market for safety, pushing up bond prices and lowering yields, reflecting deepening worries over growth prospects in the market.

Private Credit: An Indicator Sensing Danger Earlier than the Market

Hartnett emphasized in his report the historical correlation between bank loan funds and market risk events: whenever it has fallen below the 200-day moving average, it has typically heralded major market turmoil, such as the RMB depreciation in 2015, the COVID pandemic in 2020, and the UK pension crisis in 2022—without exception.

In his view, the private credit market is either the most forward-looking early warning indicator, or itself the catalyst for broader market contagion. With both SRLN and XLF falling below key levels, Hartnett has determined that the conditions for the “proper flush” he previously described have been met.

South Korean Stock Market: Bubble Warning Sounded, Take Short-Term Profits

Hartnett has turned his attention to the strong rebound in emerging markets and has expressed clear concern over overheating valuations in the South Korean stock market. He notes that SK Hynix's stock price has risen fivefold in the past ten months, and if it rises another 18%, the total increase would be on par with Cisco's sixfold “bubble rally” between October 1998 and March 2000.

He compares the current overbought level of the KOSPI index with that of gold in January 2026, Bitcoin in March 2024, and the "Mag7" stocks in July 2023—all of which experienced significant pullbacks afterwards. Hartnett warns that a reversal in South Korea's current rally could simultaneously drag down the Nikkei index (which is at a historical high) and the RMB exchange rate.

The Solo Show of US Stocks Ending? International Stocks to Outperform in the Long Run

Although he remains cautious in the short term, Hartnett’s long-term framework remains bullish on non-US markets. He thinks that international equities will, overall, outperform US equities in the latter half of the 2020s, driven principally by fiscal expansion, populist policies, and the end of the deflationary era.

He cites data indicating that currently, markets outside the US account for only 38% of the world’s $97 trillion in total equity market capitalization, while the US accounts for as much as 62%—this structural imbalance provides international stocks with room for long-term revaluation.

In addition, the impact of AI on the labor market is gradually becoming evident (such as Block’s recent 40% layoffs, with AI being cited as the reason). Coupled with the potential negative impact on US GDP and S&P 500 revenues, compared to the EAFE and emerging markets indexes, which have a greater proportion of manufacturing and resource sectors, US stocks will be relatively worse off.

All Sectors See Net Inflows, But Divergences Are Underway

At the end of his report, Hartnett disclosed the latest week’s global fund flows, with all asset classes recording net inflows: stocks saw $38.1 billion in inflows, cash $38.0 billion, bonds $16.8 billion, gold $6.2 billion, and cryptocurrencies $0.3 billion.

Notably, investment-grade bonds only saw $9.6 billion of inflows in a week, the lowest in the past seven weeks, but the annualized inflows since the beginning of the year have already set a record at $708 billion; the Korean market had a single-week inflow of $3.7 billion, with $21.0 billion year-to-date, surpassing any full-year record in history. Continuous fund inflows coexist with technical warning signals, making market trends even more bewildering and unpredictable.

Risk Warning and DisclaimerThe market has risks, and investment should be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investments made based on this article are at your own risk. ```