Perspectives

Credit markets seem poised for increased activity supported by global economic growth, cooling core inflation, optimism for soft landings, anticipated deregulation in the U.S. and lower cost of debt. The recent U.S. election continued a global trend of voters looking for a change from incumbents and the status quo. In fact, a recent Harvard University study shows that, since COVID first hit in 2020, 74% of western democracies have ousted their incumbent leader. Broader geopolitical issues remain, and the outlook for U.S. policy—in particular potential tariffs and the global response to them—will be a key factor in global growth and inflation. Slightly-less-high-for-longer rate environments still seem likely as markets grapple with balancing these global factors – the number of incremental interest rate cuts through year-end 2025 priced in the U.S. is now down to 3.5 from eight.    

Back to the '90's

The current interest rate environment feels reminiscent of the mid-1990s, when Greenspan’s U.S. Federal Reserve hiked base rates seven times over 12 months…and then ultimately cut base rates three times over the following year as inflation eased and signs of economic weakness started to emerge. The interest rate cuts were aimed at a soft landing—achieving acceptable economic growth while ensuring inflation and unemployment aren’t too high. In the mid-1990s those initial base rate increases also caused credit spreads to tighten (like today) and remain tight for the next 30 months, as equity and credit markets were supported by a broader risk-on theme given the successful soft-landing. This extended period gradually transitioned as financial pressures built, including the Russian financial crisis and the challenges faced by hedge fund LTCM in 1998. Rates ultimately reset over several years, culminating with the bursting of the technology bubble in the early 2000s.  

Today, we are less than a year into a tighter spread environment, which could indicate more of the same for credit spreads in 2025 (subject to any major shocks).    

Number of U.S. rate cuts priced in by the end of 2025

Historical periods when USD High Yield Spreads were below 350bp

When analyzing key economic and lead indicators, we can see a number of similarities between 1995 and today. Growth in consumer prices, strong equity market returns and real GDP growth are nearly identical between the two periods (shown in green shading below). However, some of these indicators are less constructive today than they were in 1995, particularly the Leading Economic Index (LEI), which aims at providing an early indication of turning points in the business cycle, labor force participation rate, government debt relative to GDP and tightening in bank lending. We will continue to monitor these data points in coming months to see if any further patterns emerge.

An NDA Wave?

The probability, size and follow-on impact of any new or amended U.S. tariffs in 2025 are difficult to predict but will be a key area of focus in the coming year. We’re more likely to see dislocation in industries like manufacturing, retail and other adjacent sectors. While negotiations will likely impact many products across many countries, all eyes will be on China as the world’s largest exporter of goods and the largest trading partner for the U.S. China will need to strike a balance between possible retaliatory measures and ensuring their own economic growth and global influence.  

There is no M&A wave just yet, but these transactions continue to pick up as companies feel more confident in the outlook. Once again, we took a look at the volume of signed Non-Disclosure Agreements (NDA)—a key legal document at the start of an M&A process. Ontra, the global AI legal tech firm for private markets, shared their latest data which shows that—on a rolling 12-month basis—there has been a 10% increase in activity from just over a year ago. This is broadly consistent with the latest findings from the EY Global CEO Confidence Index, which interviewed 1,400 CEOs globally and showed an increase in confidence around outlook. In fact, according to the survey over 40% of CEOs are now looking to complete an acquisition, divestment or IPO in the next 12 months (across the U.S., Europe and Asia).  

Buyside Non-Disclosure Agreements Count (last 12 months)

U.S.

In the fourth quarter of 2024, the U.S. economy showed resilience, driven by a rebound in employment and steady consumer spending. Nonfarm payrolls rose by 227,000 in November, recovering from October’s weather- and strike-related slowdown, which saw gains of just 36,000. The unemployment rate ticked up to 4.2%, while job openings held steady, signaling a balanced labor market. Consumer activity remained a key growth driver, supporting an annualized GDP growth rate of 2.8% in Q3—slightly below the prior quarter’s 3% pace but reflective of sustained demand. Core Personal Consumption Expenditures (PCE), the Federal Reserve’s preferred inflation metric, rose by 0.27% in October (2.8% YoY), maintaining a six-month trend consistent with easing price pressures. This trajectory, while bumpy, aligns with the Fed's efforts to balance growth and inflation expectations.  

Monetary policy adjustments continued to dominate credit market narratives. In November, the Federal Reserve cut the federal funds rate by 25 basis points to a target range of 4.5%–4.75%, emphasizing its commitment to supporting economic growth. The rate cut, while expected, came amid cautious optimism about inflation trends. As Atlanta Fed President Raphael Bostic remarked, “The base case remains for inflation to continue falling,” citing a lagging housing component which is expected to decline. Meanwhile, financial markets responded positively, with major indices reaching record highs. The incoming Trump administration has added another layer of complexity for credit markets. On the positive side, expected deregulation, corporate tax cuts and pro-growth policies could drive increased M&A and LBO activity and strengthen fundamentals. However, trade policy uncertainty and the potential for sector-specific tariff exposure present downside risks. Investors are closely watching these developments, balancing optimism over stronger corporate balance sheets and activity with caution around geopolitical and policy volatility.  

Europe

European markets are coming to grips with an outlook dominated by a Trump administration, with the expectations for tariffs as a central theme and polarising rhetoric that will determine which allies truly agree with an ‘America first’ agenda. Keeping this in mind, volumes in the high yield and leveraged loan markets are strong for the year to date, with loan formation at record levels and high yield issuance currently running at the second highest on record. The relative calm following the U.S. election has driven spread tightening in the U.S., but those results have not had the same effect in Europe. Geopolitical tensions on the eastern front could reach a conclusion in the coming year, and while that does not necessarily lead to a strengthening credit environment, it does provide a path to cheaper energy and other input costs. Coupled with an expectation of continued support from the European Central Bank and waning inflation in the Eurozone, the technical backdrop looks positive. In the U.K., however, there are still questions around whether the budget and high tax environment will result in growth, and the spectre of lingering inflation is more akin to the U.S. than the EU. Nonetheless, flat to slightly up in terms of growth still bodes well for credit.   

APAC

For the first two-thirds of the year, Asia was quieter in overall activity for M&A and credit on an absolute basis and relative to its historical proportion of global activity. However, the last three months has seen a marked uplift in activity across the region. Private credit funds continue to deploy, and investment banks and commercial banks have also stepped up their activity levels, with a number of large and mid-market financings already signed and a robust pipeline still looking to be executed before year-end. The rates outlook is more mixed, with higher US base rates and stronger U.S. dollar making it harder for emerging markets issuers to borrow in international capital markets, potentially reducing portfolio flows to emerging markets. Country specific factors are driving most of the movement in forward curves.  Specifically, growth in India and Southeast Asia is expected to moderate slightly in 2025 compared to 2024 due to effects of monetary tightening and moderating economic outlook on trade with key partners. Japan is expecting a rate hike shortly and Australia continues to wait for its first rate cure. More domestically driven economies (i.e., India, Indonesia and Philippines) may be less affected but still not immune to a potential tariff hit on China. More broadly, the outlook for 2025 looks strong across the region with the aforementioned EY Global CEO Confidence Index showing 74% of APAC CEOs feeling optimistic about their own countries’ outlook for the coming year—the highest level of the three major global regions.        

Conclusion

The risk-on theme in credit and equity markets looks set to continue into 2025 with global economies largely on solid footing. Policy decisions in the U.S. and geopolitical turmoil—or resolution—are likely to be the key external factors that influence some industries and credits (outside of the usual risks they face in each of their respective sectors). As a result, there will be a watchful eye on inflation movement and likely a continuation of elevated base rates. Elevated “noise” in the media next year is probable as tariff talk and other U.S. policy decisions dominate headlines, but it will be important to focus eyes and ears on assessing where negotiated outcomes are likely to land and trying to quantify the impact on underlying credits.