Yields trump spreads: Global Credit in 2025

Macroeconomic Uncertainty and Central Bank Policies

2024 saw low global growth but no recession, with the US outperforming Europe in growth outlook (based on IMF projections from October 2024). Central banks turned the corner last year, with the Federal Reserve in the US joining the cutting cycle a bit later in September 2024. This trend is likely to continue in 2025, though divergences may deepen. While Europe’s fiscal deficit is expected to decrease, the US deficit is projected to rise¹ due to the Trump administration’s top-down policies, including tariffs, deregulation, sanctions, taxes, and immigration reform.

On the other hand, these policies could have significant implications across various sectors. For instance, reduced regulation in the banking sector might spur loan growth and capital market activities, while easing capital requirements for large banks. In the utilities and energy sector, incentives for clean energy could be reduced, and some emissions policies might be rolled back, potentially delaying the retirement of coal plants. Lastly, in the telecom, media, and technology sector, a lower corporate tax rate could provide financial relief, while the auctioning of new spectrum licenses and an increase in mergers and acquisitions—particularly in the media industry—are likely outcomes.

Corporate Credit Trends

Corporate credit metrics remain robust, with leverage improved and consolidating, and the interest coverage ratio returning to pre-COVID levels in both the US and Europe². Profit margins have strengthened, and earnings expectations for 2025 are decent³. While the recent positive credit rating trend is likely to balance, low BBB-rated corporates stand to benefit from upgrades more than other categories.

Merger and acquisition (M&A) activities, as well as capital expenditures (capex), are expected to rise from a low base⁴. Additionally, corporate hybrid issuance may provide support by easing the impact on credit metrics. Default rates remain low, giving investors confidence in corporate bonds⁵.

Bond Issuance Outlook

Corporate bond issuance in USD and EUR for investment-grade segments is expected to remain high in 2025, driven by redemptions, M&A activity, and capex spending, however, higher coupon payments are expected to absorb much of the net supply⁶. Additionally, inflows into global credit are supported by improved pension funding ratios in developed markets⁷, While market liquidity—as measured by bid-ask spreads—has improved over recent years⁸.

Investment Implications

Valuations remain tight, with spreads screening narrow. However, global credit continues to attract investors due to its yield advantage over other asset classes, such as equities⁹, and improved market characteristics. Notably, bond duration has decreased, average bond prices remain historically low, and the diversification potential has improved with a larger number of issuers and enhanced credit quality¹⁰.

Value in fallen angels is becoming more substantial, presenting opportunities for selective investors. Meanwhile, some sectoral trends persist, including a preference for senior bank bonds over non-financials. On top of that, sector dispersion is increasing as illustrated by the automotive sector. Spreads in the automotive sector generally widened relative to the broader investment-grade universe but they also followed diverging trends: US Dollar automotive spreads tightened following a period of moderate stress, while EUR automotive spreads continued to widen. This larger dispersion created opportunities for active portfolio managers across the global automotive universe¹¹.

Conclusion

Despite ongoing macroeconomic uncertainties, we believe that 2025 can be another solid year for corporate bond investors. Resilient credit fundamentals, technical support from robust demand, and selective opportunities in specific sectors and fallen angels will likely drive returns. A discerning, active approach remains essential to navigate the challenges and opportunities ahead in an attractive global credit market.