Investors anticipate increased volatility in US corporate bond spreads next year due to the Trump administration's policies and potential inflation.
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 implements a reform agenda that could be inflationary and slow the pace of U.S. interest rate cuts. Corporate credit spreads, the premium over Treasuries that companies pay for debt, widened last week after the Federal Reserve's December meeting.
The Fed cut interest rates by 25 basis points but Chair Jerome Powell expressed caution about further reductions without seeing progress in lowering stubbornly high inflation.Strategists expect this pressure on spreads to persist as they see demand moderating for corporate bonds, which drove spreads to their tightest in decades this year. 'We expect demand to moderate somewhat in 2025 given the expectation for rates to remain elevated,' said BMO credit strategist Daniel Krieter. He expects this moderation in demand, alongside struggling corporate fundamentals and volatility as Trump takes office, to send credit spreads wider in the new year. Krieter expects investment-grade bond spreads to touch a low of 70 bps in the first quarter of 2025, from 82 bps on Friday, and a peak of 105 bps by the end of next year. 'A lot of the policy that's out there right now is inflationary, or is expected to potentially be inflationary. It certainly leans that way,' said Nick Losey, portfolio manager at Barrow Hanley. The uncertainty about the impact of the new administration's policies on markets is now expected to push companies to bring forward their debt-issuance plans to the first quarter. Some strategists predict investment-grade bond issuance next month to touch between $195 billion and $200 billion, and to set a record, beating $195.6 billion in January 2024. Junk bond issuance in January is expected to range between $16 billion and $30 billion, said one strategis
CORPORATE BONDS INFLATION INTEREST RATES TRUMP ADMINISTRATION MARKET VOLATILITY
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