Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets totalled USD 407bn-equivalent in the first quarter of 2026, representing a 24% year-on-year (YoY) decline, according to Debtwire data. Nonetheless, issuance was 29% higher quarter-on-quarter (QoQ), reflecting a strong start to the year before fears of artificial intelligence (AI) disruption and escalating macro volatility stemming from the US and Israel war with Iran weighed on market activity.

Robust collateralised loan obligation (CLO) formation and fund inflows, combined with a constructive macro backdrop, set the stage for issuer-friendly conditions at the start of the year. Market activity flourished in January, particularly in the leveraged loan markets, where investor demand continued to exceed supply despite an influx of new‑money transactions. Strong technicals pushed spreads close to all-time tights, while a growing share of loans trading above par fuelled one of the largest loan repricing waves on both sides of the Atlantic.

However, this momentum was cut short in the latter part of January, as mounting fears over AI-driven disruption sparked a sell-off in the tech sector, particularly among software-as-a-service (SaaS) providers. The AI narrative continued to dominate sentiment in February, triggering another sell-off and effectively shutting primary markets to issuers with any perceived exposure to AI disruption. As investors focused on reassessing AI risk in their portfolios, some were broadly exiting software positions, while others viewed the sell-off as overdone and used the opportunity to selectively buy on the dip.

The markets had yet to digest AI-driven volatility when a fresh geopolitical shock emerged. Credit indices widened and issuance slowed further in March as the global macroeconomic outlook deteriorated following the launch of military action against Iran in late February. With the virtual blockade of the Strait of Hormuz – through which around 20% of global oil and gas supply flowed last year – Brent crude prices surged above USD 100 per barrel in March from the low‑70s on 27 February. Other commodity prices also rose amid broader supply‑chain disruption, fuelling concerns over inflation and a potential economic downturn.

Investors again sifted through their portfolios, repositioning for higher energy prices, renewed inflationary pressure and potential interest rate hikes. Many businesses today have improved cost pass‑through mechanisms than in 2022 when Russia’s invasion of Ukraine triggered a sharp rise in energy prices. However, some investors caution that this time around the disruption is broader in scope, whereas consumers are more stretched than in 2022, leaving less headroom to absorb further price increases without eroding demand and volumes.

While consumer-driven and travel-related credits could feel the impact of rising energy prices, shipping and energy sector credits could benefit from respective higher freight rates and oil prices, whereas the chemicals sector faces mixed impacts from raw material cost changes.

However, there is optimism the war with Iran could soon come to an end as US President Donald Trump announced a two-week ceasefire on 7 April, conditional on Iran’s opening of the Strait of Hormuz. In response, oil prices fell below USD 100 per barrel and stock markets rallied. Although the situation remains highly fluid, peace negotiations could reignite primary market activity.