Credit Market Jitters: AI Disruption and the Leverage Loan Domino Threat

It’s not every cycle that you see the $3.5 trillion leveraged loan and private credit markets sitting on a powder keg with a lit fuse labeled “AI disruption.” But here we are, 2026, and the market’s favorite bogeyman, artificial intelligence, is no longer just coming for your job, it’s coming for your CLOs. The real story is not the S&P 500’s mechanical rotation or the Nasdaq’s AI-induced nosebleed. It’s the slow, almost bored, way credit markets have started to price in a regime shift that could make the 2022 bond tantrum look like a toddler’s tea party.

Let’s start with the facts. UBS’s Matthew Mish, never one for hyperbole, called out the leveraged loan and private credit markets as the next dominoes to fall if AI-driven disruption accelerates. His warning, published on CNBC on February 13, comes as leveraged loan spreads have quietly widened by 40 basis points since the start of the year, even as equities have flatlined. The leveraged loan index is still up marginally on the year, but the bid-ask spread has doubled since December, and new issuance has slowed to a crawl. Private credit, the darling of the post-COVID yield hunt, is seeing deal terms tighten and covenants creep back in. That’s not a sign of a healthy market. That’s lenders remembering what risk feels like.

Meanwhile, the S&P 500 is stuck at $6,870.1, refusing to break out or break down. Volatility is comatose, but under the surface, dispersion is spiking. The real action is in the plumbing: credit default swaps on mid-tier tech names have ticked up, and the cost to hedge high yield is at a six-month high. This is the market’s way of saying, “We’re not buying the AI utopia just yet.”

Why does this matter? Because credit is the oxygen of the real economy. If AI disruption triggers a wave of downgrades or, worse, defaults in the leveraged loan space, it won’t just be some obscure CLO desk in London feeling the pain. It will be pension funds, insurance companies, and anyone who thought private credit was a free lunch. The last time we saw a regime shift in credit, think 2008, think 2020, the knock-on effects were brutal and indiscriminate. The difference this time is that the risk is hiding in plain sight, and the market is pretending not to notice.

Look at the macro backdrop. Inflation is cooling, January’s CPI print came in at 2.4% year-on-year, a touch below consensus, but the Fed isn’t declaring victory. The minutes from the last FOMC meeting, due next week, will be pored over for any sign of dovishness. But here’s the rub: even if rates stay high, the real risk is not a spike in yields, it’s a credit event triggered by a sudden re-pricing of AI-exposed sectors. The market is pricing in a soft landing, but the credit market is whispering that the landing could be bumpier than anyone expects.

Historically, credit markets have been the canary in the coal mine. In 2007, it was subprime spreads. In 2015, it was energy junk bonds. In 2022, it was everything at once. Today, it’s leveraged loans and private credit, with a side of AI existential dread. The dispersion in S&P 500 returns is a symptom, not the disease. The disease is a market that has forgotten how to price disruption until it’s too late.

The mechanical rotation out of software and into defensive names like Walmart is not a sign of confidence. It’s a sign that the algos have taken over, and the humans are hiding in the safe corners. But the real risk is that the credit market, not the equity market, will be the first to break. And when it does, the unwind could be fast and ugly.

Strykr Watch

Technically, the leveraged loan index is flirting with its 200-day moving average, and the next support sits 2% below current levels. High yield spreads are at 420 basis points, with resistance at 450. The S&P 500 is pinned at $6,870.1, with resistance at $6,900 and support at $6,800. Watch for a break in either direction as a signal that credit stress is spilling over into equities. The VIX is still asleep, but a spike above 18 would be a red flag. For private credit, watch deal flow and covenant trends, if new issuance dries up, that’s your cue that the market is getting nervous.

The risk is that a single high-profile default could trigger a cascade of forced selling. CLOs are levered beasts, and when the margin calls come, they come all at once. The opportunity is to get ahead of the herd, short the weakest links, hedge with CDS, or position for a volatility spike. But don’t wait for the headlines. By then, the easy money will be gone.

If you’re looking for actionable ideas, consider hedging equity exposure with puts on the S&P 500 or buying protection on high yield ETFs. On the long side, look for quality balance sheets and avoid anything with “AI” in the pitch deck unless you like living dangerously. The spread between investment grade and high yield is your early warning system, if it blows out, get defensive fast.

Strykr Take

This is not the time to get complacent. The credit market is sending smoke signals, and the AI narrative is masking real risk. The S&P 500 may be sleepwalking, but credit is wide awake. Don’t be the last one out when the music stops. Strykr Pulse 42/100. Threat Level 4/5. This is a market to trade, not to trust.