Wall Street banks start trading derivatives to bet on pain in private credit

TL;DR

Wall Street banks including JPMorgan Chase and Barclays have begun trading credit default swaps on flagship private credit funds.
The CDS target funds run by Blackstone, Apollo Global, and Ares Management, with Morgan Stanley and Citigroup also offering trades.[[1]](https://www.reuters.com/legal/transactional/wall-street-banks-trade-derivatives-bet-pain-private-credit-ft-reports-2026-04-17)
This enables investors to bet on or hedge against stress in private credit amid recent outflows and concerns over software loans.[[2]](https://www.wsj.com/finance/wall-street-builds-new-tool-to-bet-against-private-credit-bdf8bafa)

The story at a glance

JPMorgan Chase, Barclays, Morgan Stanley, and Citigroup are trading credit default swaps linked to major private credit funds from Blackstone, Apollo Global, and Ares Management, according to people familiar with the matter cited by the FT. The products allow bets on potential distress in the funds, which have faced redemption pressures and exposure to troubled software companies. This development comes as Wall Street responds to growing strains in the $2 trillion private credit sector, highlighted by recent fund gates and bank markdowns on related loans.

Key points

Banks started trading these single-name CDS contracts on the three flagship funds in recent days, marking a new way to short or hedge private credit exposure.[[1]](https://www.reuters.com/legal/transactional/wall-street-banks-trade-derivatives-bet-pain-private-credit-ft-reports-2026-04-17)
JPMorgan and Barclays lead the effort, with Morgan Stanley and Citigroup offering similar contracts, per FT sources.
Private credit funds have seen heavy outflows, redemption caps (e.g., Apollo and Ares limiting withdrawals), and investor wariness due to loans to software firms hit by AI disruption.[[2]](https://www.wsj.com/finance/wall-street-builds-new-tool-to-bet-against-private-credit-bdf8bafa)[[3]](https://www.reuters.com/business/finance/private-credit-strains-ripple-through-wall-street-investors-grow-wary-2026-04-02)
JPMorgan has marked down some private credit collateral loans, especially those tied to software, and tightened lending terms.[[4]](https://www.bloomberg.com/news/articles/2026-03-11/jpmorgan-marks-down-private-credit-portfolios-ft-reports)
CDS spreads on these funds have narrowed since trading began, suggesting limited immediate stress, according to JPMorgan strategists.[[5]](https://www.bitget.com/amp/news/detail/12560605371392)
This follows earlier efforts like indices (e.g., CDX Financials with S&P Global) and total return swaps to create shorting tools for private credit managers.

Details and context

Private credit, a $2 trillion market of direct loans to companies bypassing public markets, has boomed but now faces tests from redemption surges and sector-specific risks like software loans vulnerable to AI shifts. Banks like JPMorgan hold significant exposure—about $50 billion directly in private credit within a broader $160 billion to non-bank finance—and use these derivatives partly to hedge their own loans to fund managers.[[6]](https://www.reuters.com/world/jpmorgans-private-credit-exposure-was-50-billion-cfo-says-2026-04-14)

The CDS mimic insurance against fund defaults or stress events, filling a gap in illiquid private markets where shorting was hard. Trading remains thin so far, but it signals market maturity and investor demand amid jitters, including JPMorgan's recent collateral revaluations after "Saaspocalypse" turmoil.

This builds on prior Wall Street innovations, like baskets for shorting private credit firms or planned indices, as banks balance lending to these lucrative clients while managing risks.

Key quotes

“Private credit has grown fast and there’s a lot of financial exposure arising in different ways so there is a real demand for this product.”[[2]](https://www.wsj.com/finance/wall-street-builds-new-tool-to-bet-against-private-credit-bdf8bafa)

— Dominique Toublan, head of credit strategy at Barclays (related WSJ reporting on similar products).

Why it matters

These derivatives highlight rising concerns over private credit's resilience, potentially amplifying volatility if fund stresses mount in a downturn. Investors and banks gain tools to hedge or speculate, but thin liquidity could exacerbate swings; everyday readers should note indirect risks via pensions or banks' balance sheets. Watch CDS spread widening, further redemption data from Ares/Apollo/Blackstone, and bank earnings commentary on private credit exposure, though systemic fallout remains unlikely for now.