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US IG & LevFin 2025 Outlook: It's Complicated
Winnie Cisar - Global Head of Strategy
Zachary Griffiths - Head of IG & Macro Strategy
Logan Miller - Head of European Strategy
Brian Perez - Analyst, Credit Strategy
Kathleen Tang - Analyst, Strategy
December 24, 2024
EXECUTIVE SUMMARY
- We maintain a cautious outlook on IG and HY credit, anticipating that the risks in 2025 are skewed towards widening spreads rather than further narrowing. Key factors contributing to this outlook include elevated borrowing costs, reduced pricing power, potential broad-based tariffs, a labor supply shock, and various balance sheet strategies in a more favorable deal-making environment.
- In 2025, fundamental trends are expected to shift towards consolidation, moving away from balance sheet defense. Elevated borrowing costs, declining pricing power, potential tariffs, and labor supply challenges are anticipated to influence spreads modestly wider.
- The allocation to Broadly Syndicated Loans (BSL) has been adjusted to a more neutral stance, reflecting a preference for limited duration exposure and perceived value in loan spreads.
- The base case scenario sees the 10-year Treasury yield rising to 4.75% by the end of 2025, with the 2s10s curve in the +10-15 bp range. This forecast is characterized by higher yields and a flatter curve than current forward projections, driven by expectations for the Fed funds rate to stay between 4.25-4.50% at year-end 2025.
- Projections for slightly slower growth and higher inflation in 2025 compared to consensus forecasts inform a more hawkish Fed perspective and higher yield expectations. If the Fed’s previously-held easing bias diminishes as anticipated, markets may focus on large and potentially widening deficits, exerting upward pressure on Treasury yields and contributing to a modest bear steepener compared to spot rates.
- The key risk to this outlook is a “status quo” scenario. In 2024, strong technical factors, solid fundamentals, an easing bias by the Fed, and a resilient consumer supported credit markets and kept spread volatility low, with investors prioritizing attractive yield levels. In the base case, many of these supportive factors shift to neutral or negative, potentially leading to wider spreads after a period of consistent narrowing since late 2022.
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