Credit spreads are within historical averages, but corporate bond yields remain high and the grind continues.
- A high level of uncertainty is expected at the macroeconomic level due to the new US administration, which should keep volatility high for a long time.
- At the corporate level, we expect more fallen angels than in the past.
- Bond issuance will continue to be fueled by redemptions, as well as increased M&A activity and investment by US companies.
- U.S. corporate hybrid bonds are expected to continue to rise due to Moody’s new methodology and the need for corporate refinancing.
Credit spreads are within historical averages, but corporate bond yields remain high and the grind continues. Supported by solid credit fundamentals, credit demand is expected to remain at good levels.
The year 2024 was marked by elections and changes of course by the major central banks. With the US elections behind us, much uncertainty has now been lifted. However, the new administration should keep investors busy, including assessing the impact on trade relations, customs tariffs, deregulation and developments in tax policies. Some discussion points will impact sector positioning and specific stocks, requiring investors to remain attentive. At the same time, the American economy is showing a good level of growth, while Europe is losing momentum. This could translate into a divergence in monetary policies in 2025, with the ECB potentially more inclined to cut rates more aggressively than the Fed.
We were surprised by the high number of bond issuances in 2024, given that US companies are on average paying 2 points more for their newly issued debt than maturing bonds.
At the corporate level, credit indicators remain generally stable. The average rating has been increasing for three years and very little deterioration of the debt. For 2025, we expect this trend to end and see more fallen angels. The default rate should remain very low, which should reassure investors and encourage them to maintain their positions. In addition, the expected growth of US corporate profits is expected to double compared to 2024, which will help keep credit indicators balanced. Given that many companies have achieved their M&A targets in recent quarters, the surge in M&A activity may be of greater concern. The new American administration could support this trend, which would primarily affect certain sectors, such as the media. The still high financing costs will to some extent calm this possible trend towards increased mergers and acquisitions.
We were surprised by the high number of bond issuances in 2024, given that US companies are on average paying 2 points more for their newly issued debt than maturing bonds. For 2025, we continue to expect a high level of issuance, driven by a high volume of maturing debt, an increase in M&A activity and an increase in capital expenditure (capex). In our view, this high amount of new debt will not be a cause for concern. Actual net supply appears much lower, and higher coupon payments help drive demand that largely absorbs emissions. As long as yields remain high, we should see continued inflows into credit funds.
Indeed, credit spreads, measuring the risk premium, seem tight from a top-down perspective. It may become more difficult to find value in the market and effort should be put into selecting both the right sectors and the right stocks. On this last point, it will be essential to avoid credits which tend to decline, the “fallen angels”. In some sectors, dispersion has already started to increase, creating investment opportunities. When assessing the value of the market as a whole, the characteristics of investment grade bond indices have improved: for the index, duration (as a measure of interest rate risk) has decreased over time. Over the years, the average price of a bond has always been well below par and, on average, the quality of major credit indices has improved thanks to all the rating upgrades in recent years.
We therefore expect another good year for corporate bond investors, thanks to strong credit fundamentals and good technical support, such as strong demand.
