Outlook 2025

    Debt and credit markets

    Central bank easing cycle to provide support

    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.

    • Duration. Following clear signals from central bank officials that further easing is likely, bond markets have moved to price in aggressive easing cycles by most major central banks in the coming quarters (with the notable exception of the Bank of Japan, for which further hikes are priced). While this pricing may limit the extent to which bond markets can ultimately rally, that central banks have only recently commenced easing should limit the extent of any selloffs. We therefore expect US Treasury yields to ease but remain within specific ranges, while US Federal Reserve (Fed) easing should underpin a further steepening of the yield curve. With superior relative valuations and fundamentals in European and Australian markets we expect these fixed income securities to perform better than those in other developed world (DW) geographies.
    • Credit. While spreads are already tight, a number of positive factors are expected to see spreads trade in a relatively narrow range from here. With monetary and fiscal policy set to provide more ballast to the growth outlook than was earlier expected, this should provide fundamental support. Moreover, while spreads are tight, all-in yields remain high relative to recent history, and expectations of positive total returns should drive demand.
    • EM debt. With credit quality generally stable for emerging markets (EM), we see opportunities to take advantage of the structural spread pickup in EM corporates as well as opportunities in EM local currency bonds. The Fed easing cycle should help to reduce underlying credit risks.
    • Structured securities. Measured rate cuts coinciding with a stable economic outlook are expected to be supportive of securitised product fundamentals. Further spread compression may, however, be limited by current valuations.

    Figure 1: Market is pricing somewhere between disinflation and something breaking

    Graph depicting market is pricing somewhere between disinflation and something breaking Source: Macrobond (October 2024).

    Private credit: Continued secular shift and increased deal flow to drive new opportunities

    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.

    Headshot of Patrick Er

    Patrick Er 
    Economist
– Credit

    Headshot of Sophie Photios

    Sophie Photios  
    Economist
– Credit

    Headshot of John Horner

    John Horner 
    Global Credit Strategist
 

    Listen now for an insightful discussion on where our experts think the market is headed in 2025. We take a look at inflation and interest rates in the coming year and the investment implications of President-elect Trump's policy agenda.

     

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