Corporate Credit Snapshot - February 2025

February 11, 2025

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US

US markets started 2025 on a strong note, delivering positive total returns across the board.  High yield—led by the lower rating buckets—outperformed both investment grade and leveraged loans on significant spread compression driven by the new US administration putting forward more limited initial policy changes than initially anticipated.  While Q4 GDP growth fell slightly short of expectations, a strong labor market continues to support domestic consumption.  Government bond yields moved lower, particularly in the back half of the month after a softer than expected CPI (Consumer Price Index) report triggered a rates rally (rates moved down).  This, in turn, accompanied by healthy initial fourth quarter earnings reports and positive economic momentum, triggered a risk-on environment for the second half of January.  The Federal Open Market Committee voted to keep the policy rate steady this month, indicating a preference to wait for the new political administration’s economic policies to take shape before cutting rates further, while acknowledging that inflation remains elevated.

EUROPE

In Europe, credit markets were predominantly positive.  While the European Central Bank (ECB) cut rates again and struck a balanced tone, the Federal Reserve in the US held rates and took a hawkish tone – cautioning the market about expecting too many cuts this year.  In our view, at the ECB’s press conference, the governing council seemed comfortable with the cuts currently expected, resulting in a dovish reaction from the market.  In investment grade, European spreads drew tighter for the month, while US spreads were mostly unchanged. Strong performance in European investment grade was aided by lower primary volumes than expected, as well as the ongoing spread premium available in European markets.  However, in high yield, while European spreads drew slightly tighter, US spreads were significantly tighter, driven by positive investor expectations related to the new political administration and proposed policies aimed at supporting US domestic issuers.

EM

Emerging Market (EM) generated strong positive returns in January.  High yield outperformed investment grade debt, with notable outperformance from the lower rating tiers.  EM sovereign debt also posted healthy gains on the back of a sharp rally in Ecuadorian bonds as investor confidence surged on expectations of a second term for current President Daniel Noboa.  Improved sentiment regarding Ukraine following the inauguration of the new US administration also helped bolster returns. Within the EM high yield space, Latin American commodities performed notably well, benefiting from rising commodity prices and improved access to funding markets.  In the EM investment grade universe, Asian credit—including a strong rebound in Indian corporate credit—drove returns this month.

OUTLOOK

January was a strong month for credit markets with several sources of divergence including central bank decisions.  At the very end of the month, we started to get news of US trade tariffs on Canada and Mexico as President Trump seems intent on delivering on one of his campaign promises to support US industries. We would expect this news to weigh on European spreads in February as the market seems to fear similar action towards Europe.  In the US, while high yield spreads are tight by historical standards, we believe they remain justified by a supportive technical and fundamental backdrop, as well as by what we view as attractive yields.  Credit quality is strong, and defaults are below long-term averages; we believe these dynamics should hold under a domestic growth and deregulation focused policy agenda. Moreover, with supply constrained, new issuance continues to be well-received and provides ongoing pull-to-par opportunities, while a pickup in M&A activity could offer total return potential to a market that remains broadly convex.

 

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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