Outlook 2025
Having spent much of the past few years pricing the risk that rates would stay higher for longer due to persistent inflationary pressures, the backdrop for bond markets improved in 2H24 as inflation moderated and central banks started the process of normalising monetary policy settings.
A substantial degree of central bank easing is already priced into most rates markets, while credit spreads have tightened in recent months and are currently relatively narrow by historical standards.”
Looking ahead to 2025, a substantial degree of central bank easing is already priced into most rates markets, while credit spreads have tightened in recent months and are currently relatively narrow by historical standards. This limits the upside in terms of returns for bonds, and equity asset classes are likely to benefit more from the macroeconomic environment that we expect to see in 2025. That said, yields have improved significantly in recent years, and absolute returns in 2025 should be healthy by historical standards.
Source: Macrobond (October 2024).
The private credit market outlook for 2025 is shaped by a blend of enduring trends and recent financial dynamics. The transition towards non-bank lending is expected to deepen, broadening the scope and appeal of private credit as an investment class. This shift comes amid a backdrop of high interest rates and credit spreads that are attractive, particularly relative to their public market equivalents. While a moderation in returns is anticipated due to decreasing interest rates, the adjustment across all markets should preserve the relative attractiveness of these investments. Moreover, the predominance of low-duration investments within the private credit sector offers stable valuations regardless of changes in the interest rate environment.
The transition towards non-bank lending is expected to deepen, broadening the scope and appeal of private credit as an investment class.”
Direct lending is poised for significant growth, fuelled by an uptick in private equity deal flow, driven by a backlog of transactions, elevated public market valuations, and substantial private equity dry powder. This expansion is mirrored in the infrastructure debt sector, which is set to benefit from the transformative effects of digitalisation, decarbonisation, and demographic trends. These global shifts not only increase the demand for infrastructure financing but also enhance the sector’s investment appeal. Together, these factors – ranging from the structural move towards non-bank lending to the opportunities in direct lending and infrastructure debt and burgeoning opportunities in new forms of private credit – point to a dynamic and prosperous landscape for private credit in 2025, offering continued growth and attractive returns for investors navigating this evolving market.
Patrick Er
Economist
– Credit
Sophie Photios
Economist
– Credit
John Horner
Global Credit Strategist
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Credit risk is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower expects to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.
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