Volatility is no longer an exception — it is a persistent feature investors must navigate

At the start of 2025 we described Credit’s “iPhone moment” as a pivotal shift toward integration, simplicity, and the power of a single interface to unify market complexity. We also noted that while market sentiment remained optimistic heading into 2025, we were focused on the market tea leaves: rising geopolitical tensions, expanding fiscal deficits, sustained inflationary pressures, and looming tariffs. 

At the time, we viewed these signals as early hints of a potentially more complex environment ahead, even as broad market consensus leaned toward a surge of animal spirits carrying markets higher.

What few investors anticipated was just how disruptive one of those undercurrents — in particular, tariffs — would become. Meanwhile, at KKR, we were increasingly attentive to signs that the tide might be changing. As the final days of the first quarter approached, the market’s tone shifted. Issuance slowed, deals began to stall, and attention turned to the anticipated reveal of “Liberation Day”. At the same time, we continued to grapple with the zealous yearn for yield, compressed spreads, and a persistent lack of supply. The deepening bifurcation between high-quality and storied credits was becoming harder to ignore.

Throughout the second half of 2024, we highlighted what we called a “non-obvious” market with dispersion already quietly taking hold beneath the surface. Some of this reflected the reality of ensuing rolling recessions, where different sectors, for example, consumer goods or media, faced pressure at different times, creating an uneven but growing gap between the haves and have-nots. High-quality BBs were tightening toward historical tights, while CCC-rated credits began to drift wider, largely under the radar. Separately, we would be remiss not to acknowledge the exuberance across equity markets. Equity valuations were elevated, and the S&P 500 was trading around 22x forward earnings by Q1’25, which is considered expensive by historical standards. 

Against that backdrop, a market shakeup was not inconceivable — it could be argued it was overdue.

Then came the twist: headlines turned to tariffs — specifically those on China — directly impacting widely used consumer goods, including Apple’s iPhone. This was surely a different kind of disruption than we had in mind when we introduced Credit’s “iPhone moment” last quarter — this one simply made it more expensive. A reminder that market metaphors can often collide with reality. 

This time, the idea of a streamlined credit interface met a practical truth: even the most iconic systems can be exposed to policy and pricing power risks. The pressure that had been building in the markets found its release in rates. The 10-year U.S. Treasury yield surged toward its biggest five-day increase since 1982, followed closely by a sharp sell-off in the 30-year. 

Yields spiked, liquidity thinned, and what began as scattered signals became something closer to flashing warning lights. 

A good reminder for D.C. of the significant role a stable U.S. Treasury market plays.

As we reflect on the quarter and the early weeks of April, the moment carries a sense of déjà vu — a slight echo of March 2020. However, the difference this time is in the catalyst, structure, and response. Markets were truly shocked during COVID. The entire world froze with little line of sight to a resolution, a shock that impacted all. Today’s volatility is not the same. This is a policy-induced reaction, and while the mark-to-market volatility has been acute, including 10% intra-day swings not seen since the Great Financial Crisis (“GFC”), the structural backdrop is different. 

We have muscle memory and a playbook for this, and while risks remain, there is clarity regarding what needs to happen next. 

We are not navigating a global shutdown; we are adjusting to a global risk recalibration. Nothing is linear on the way down. As such, we are positioning thoughtfully to reflect on the recalibrated risk environment.

This is our second rendition of V for Volatility, a symbolic nod to the Q1 2020 note we published under the same title, during what has proven to be the opening chapter of a lasting and historically significant regime change. Since then, markets have endured a cascade of macroeconomic, geopolitical and structural shifts that have broadened access to capital and reshaped its formats. 

The ground has moved and so have the guardrails. In that time, the case for fundamental credit selection, multi-asset platforms, and nimble portfolio construction has gone from a theoretical advantage to an essential operating necessity.

We have asked ourselves, is this moment truly V for Volatility Part II? Perhaps it is with a question mark. The shock is not universal; the landscape is far more uneven. But in its own way, the volatility is real and so is the opportunity it could create. 

In our view, volatility is no longer an exception — it is a persistent feature of the market environment that investors must be prepared to navigate. 

Nevertheless, in this environment, we believe strategy will outpace sentiment and structure prevail over speculation. As Sir John Templeton aptly noted, “The four most dangerous words in investing are: ‘This time it’s different.’” History rarely repeats perfectly, but it often rhymes, and the lessons of past volatility cycles remain essential to navigating what comes next.

As the quarter unfolded, many of the themes we dis­cussed earlier this year continued to evolve, but with new twists. In this note, we reflect on how volatility has returned in a more targeted way, how credit has held its ground in a shifting landscape, and why the ability to navigate across platforms and structures matters more than ever for achieving a truly diversified portfolio.

With this framework in mind, we reflect on the themes that shaped our perspective this quarter:

1: Versions of Volatility

Not All Shocks are Created Equally 

2: Interface vs. Infrastructure

When the Bond Market Speaks and Correlations Breakdown

3: The Balance has Shifted

Global Diversified Income Positioning 

This wire is an excerpt from KKR's Q1 2025 Market Review: V for Volatility: Part II? Access the full paper here.