Our Head of Corporate Credit Research, Andrew Sheets, offers up
bull, bear and base cases for credit markets in the year ahead.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Today, I’m going to
revisit our story for 2025 – and what could make things better or
worse.
It's Thursday, January 9th at 2pm in London.
Based on the number of out-of-office replies, I have a sneaking
suspicion that many investors took advantage [of] the timing of
holidays this year for a well deserved break. With this week
marking the first full week back, I thought it would be a good
opportunity to refresh listeners on what we expect in 2025, and
realistic scenarios where things are better or worse.
Our base case is that credit holds up well this year, doing
somewhat better in the first half of 2025 than the second. Credit
likes moderation, and while we think the shift in U.S. policy
leadership generally means less moderation, and a wider range of
economic outcomes, this shift doesn’t arrive immediately. On
Morgan Stanley’s forecasts, the bulk of the disruptive impact
from any changes to tariffs or immigration policy hits in 2026.
Meanwhile, Credit is entering 2025 with some pretty decent
tailwinds. The economy is good. The all-in yield – the total
yield – on US investment grade corporate bonds, at above 5.4 per
cent, is the highest to start any year since January of 2009 –
which we think helps demand. And while we think corporate
confidence and aggression will rise this year, normally a bad
thing for credit; this is going to be coming off of a low,
conservative starting point.
We think that credit spreads will be modestly tighter by
mid-year relative to where they finished 2024, and then start to
widen modestly in the second half of the year – as the market
attempts to price that greater policy uncertainty in 2026. We
think that issuers in the Financial and Utilities sectors
outperform, and we think bonds between five- and ten-year
maturity will do the best.
The bear case is that we exit the current period of moderation
more quickly. At one end, a deregulatory push by a new
administration could usher in an even faster rise in corporate
confidence and aggression, leading to more borrowing and riskier
dealmaking. At the other extreme, the strong current state of the
economy and jobs market could make further gains harder to come
by. If the rise in unemployment that our economists expect in
2026 is larger or arrives earlier, credit could start to weaken
well ahead of this.
So, how could things be better – especially given the relatively
low, tight starting point for credit spreads? Well, we’d argue
that the current mix of data for credit is border-line ideal:
reasonable growth, falling inflation, still-low levels of
corporate aggressiveness, and still-high yields that are
attracting buyers. Recall that the tightest levels of credit in
the modern era, which are still tighter than today, occurred
during a period with similar characteristics – the mid-1990s.
When thinking about the mid-90s as a bull case, there’s a further
detail that’s relevant and topical, especially this week. At that
time, interest rates stayed somewhat high and the Fed only
lowered short-term rates modestly because the economy held up. In
short, in the best environment that we’ve seen for credit, less
action by the Federal Reserve was fine – so long as the economic
data was good.
This is a bull-case, rather than our base case, because there are
also a number of key differences with the mid 1990s, not the
least being a much worse trajectory – today – for the US
government's budget. But in a scenario where things change less,
and the status quo lasts longer, it could come into play.
Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.