Bumpy ride for US corporate bond spreads expected in 2025 By Reuters

By Matt Tracy

(Reuters) – It could be a bumpy ride for U.S. corporate bond spreads in 2025, with investors and strategists expecting more market volatility as the new Trump administration pursues a reform agenda that could be inflationary and slow the pace of U.S. interest rate cuts. :

Corporate credit spreads, the premium companies pay for borrowing Treasurys, widened last week after the Federal Reserve’s December meeting.

The Fed cut interest rates by 25 basis points, but Chairman Jerome Powell expressed caution about further cuts, seeing no progress in reducing stubbornly high inflation.

Thursday’s widening of spreads followed a rise in Treasury yields after the Fed’s hawkishness.

Strategists expect this pressure on spreads to persist as they see a softening in demand for corporate bonds, which has pushed spreads to their highest in decades this year.

“We expect demand to moderate somewhat in 2025 given expectations that interest rates will remain high,” said BMO credit strategist Daniel Criter.

He expects this moderation in demand, along with corporate fundamentals and volatility as Trump takes office, to send credit spreads wider in the new year.

Krieter expects investment-grade bond spreads to hit a low of 70 bps in the first quarter of 2025, up from 82 bps on Friday, and peak at 105 bps by the end of next year.

“Most of the policy that’s in place now is inflationary or expected to be potentially inflationary. It’s certainly leaning in that direction,” said Nick Losey, portfolio manager at Barrow Hanley.

Uncertainty about the impact of the new administration’s policies on markets is expected to prompt companies to advance their debt issuance plans in the first quarter.

Some strategists forecast investment-grade bond issuance next month at $195 billion to $200 billion and set a record high of $195.6 billion in January 2024.

Junk bond issuance is expected to be between $16 billion and $30 billion in January, one strategist said, compared with $28 billion last January and $20 billion in January 2023, according to JPMorgan data.

“We expect January to be a busy month as long as the secondary market continues to look welcoming to issuance, which I would argue is still the case right now, even with the little ruckus we’ve had in the last couple of days.” , said Blair Schwedo, head of public sales and trading at US Bank.

Demand for these new bonds will remain robust as corporate bond yields could be attractive in 2025 despite potential volatility, said Andrzej Skiba, BlueBay US fixed income at RBC Global Asset Management.

“The good news is that, in contrast to the dire 2022, the starting yield for the asset class is high. Even if Treasury yields widen further, you’ll still have a negligible total return on a forward 12-month basis.” , Skiba said.