Summary
Executive Summary
2024 was the second consecutive very good year for global developed credit markets. Full-year 2024 excess returns show the outperformance of high-beta segments (riskier market segments which provide higher return potential) and EUR markets.
2025 remains a favourable year for credit markets for many reasons. Firstly, the global picture is positive and supported by a combination of resilient economic activity, inflation convergence to target, and less restrictive monetary policy in both the United States and the Eurozone. Our main concerns relate to possible upside risks to US inflation data, notably with tariffs, and downside risks to Eurozone growth.
Secondly, corporate fundamentals remain solid, as companies have taken advantage of the post-pandemic period of ultra-low interest rates and the economic recovery to improve their credit profiles. Companies have made good progress in extending maturities, easing near-term liquidity pressure on many low-rated borrowers. Resilient economic activity means credit quality should remain solid, especially in high yield (HY). We expect default rates around 3% in the US, close to their long-term average. The market is wide open, even for low-rated names, which can easily access the market to refinance. In the United States, higher rates for longer could be a challenge for the weakest credit quality cohorts, such as CCCs. In the Eurozone, the risk is more towards a more pronounced-than-expected slowdown in economic activity. Finally, private debt financing is also supportive of companies in sectors such as healthcare.
Thirdly, technical conditions remain supportive. Structurally higher interest rates should support demand for corporate credit from yield-seeking investors, who seek income before central banks cut rates further. Official rate cuts could help support bond flows from money markets towards interest rate products with a longer duration to lock in higher income. Net supply remains limited, as issuance is largely used for refinancing purposes. Finally, CLO1s’ buoyant dynamics are also fuelling demand for HY bonds indirectly, contributing to the overall support for demand in this market segment.
Finally, spreads are tight, but yield hunting remains the name of the game for most investors. We think spread compression may have run its course for this cycle. After two consecutive good years, credit spreads across both investment grade (IG) and HY are indisputably tight, but yields remain attractive compared to longterm trends. We believe corporate bonds should remain an attractive place to obtain income in 2025.
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