Corporate Credit Snapshot - March 2025

March 11, 2025

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US

US credit markets delivered positive total returns in February, but US government bonds were the outperformers, with the US 10-year Treasury yield moving more than 30 basis points lower in response to a potential slowing of the economy.  In line with this rally in rates, which more than offset spread widening, investment grade credit was the best performing sub-asset class, outperforming high yield.  US dollar-denominated debt also outperformed euro-denominated debt this month.  Nonetheless, high yield returns remained solid in February on the back of lower rates, underwhelming issuance, and steady inflows.  Investor sentiment was admittedly dampened on the back of growth concerns stemming from tariff threats, recent Purchasing Managers’ Index (PMI) weakness, consumer confidence, and labor market related data, however, in our view, corporate fundamentals remain broadly stable. 

EUROPE

European credit markets delivered positive total returns in February.  February saw meaningful rate divergence between the US and Europe; the US 10-year Treasury yield was more than 30 basis points (bps) lower for the month, while the German 10-year Bund yield was about 5bps higher.  US spreads underperformed, and the spread premium that we have seen in Europe over the last few years reversed, with the market now demanding a spread premium for US credit risk.  US investment grade spreads were slightly wider on the month, compared to flat in Europe.  In our view, this shift in momentum was driven by ongoing uncertainty around President Trump’s various policies and their impact on the US economy, and notable weakening of US economic data.  Looking ahead, investors widely anticipate forthcoming cuts by the European Central Bank in early March.

EM

Emerging Market (EM) debt generated positive returns in February.  Investment grade outperformed high yield, with Latin America leading the way due to its longer duration characteristics.  Within the high yield universe, Asian credit outperformed, driven by strength in Chinese securities. At a sector level, we saw strong performance from telecommunications and homebuilders/real estate.  While quasi-sovereigns and non-bank financials lagged, they still generated positive returns.  Looking ahead, China will host the annual sessions of its National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (collectively known as the “Two Sessions”), including an announcement of the economic agenda for the year ahead and annual GDP target.  Given the challenges to the Chinese economy, both internal and external, investors will be looking for details regarding additional stimulus, especially in relation to the real estate sector.

OUTLOOK

It was a strong month for fixed-income investors, with positive total returns globally. The continued divergence between the US and Europe—driven by uncertainty related to shifting US policies—seems to be on the minds of many investors looking ahead.  Fiscal stimulus in Europe is expected to have a positive effect on European economic growth, especially if it is accompanied by some deregulation.  In our view, economic growth in the US has been healthy, and we don’t perceive large imbalances across sectors.  However, the level of brinkmanship the world is experiencing while only a month into a new administration has the potential to undermine business confidence. With that said, we believe the US economy will continue to grow as fundamentals remain steady, valuations are fair, and market technicals remain balanced.

 

Past performance is not a reliable indicator of current or future performance. 

Muzinich views and opinions are for illustrative purposes only and not to be construed as investment advice.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of January 2025 and may change without notice.

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