Welcome to No More Risk Better, a Credit Sites Podcast. Across the global strategy team, we aim to make sense of the macro and the micro, highlighting opportunities and the risks facing the fixed income markets. As the macro makes headlines, we leverage our network of experts across fictions to better understand economic trends, rates, gyrations, geopolitical events, and how these factors impact corporates. At Credit Sites, we understand that credit investing comes down to picking winners to generate alpha and avoiding losers.
Our team over 100 analysts across the US, Europe, and Asia provide unmatched expertise and fundamental knowledge. In our weekly podcast, the strategy team offers a look at the conversations we have with our colleagues, including analysts, illustrologists, economists, and leveraged finance market experts. If you want to know more so that you can risk better, you'll want to give this podcast a listen. Hello, everyone, and welcome back to No More Risk Better, a Credit Sites Podcast.
Now, after some time off during outlook season, which is truly chaos for strategists in early December, and a much needed break for the holidays, strategy team is back in action, and we are kicking off a new format for the podcast for 2025, New Year, New Podcast. So we will have weekly episodes dropping on Thursdays, and that will continue throughout the year every week rather than doing those seasons of two episodes per week. We will also be introducing Logan Miller as a regular host on the podcast. As a reminder, Logan is our head of European strategy, and he'll be talking to our London-based analyst team to highlight some of the happenings in the Euro and Sterling markets.
Today, to kick off the 2025 podcast season, we have Zach Riffitz, our head of US macro and US investment grade strategy, and also Logan Miller, our head of European strategy. And we'll be talking about the market moves in December, how they compare to our expectations, what things we're looking for in January, and some of our key calls for 2025. Now, with that in mind, I'm going to bring in Zach first, and Zach, can you give us kind of an overview of what happened in December with the Fed and the rates of markets, because it was a lot? Yeah, thanks, Wendy.
Definitely a very eventful end to the year. And I'd say the big takeaway from the Fed meeting is they did cut 25 basis points as we expected in the market had priced in, but it substantially dialed back its expectations for monetary policy easing throughout its forecast period. So now we're just looking for the Fed is just looking for two cuts in 2025. That's down from four cuts at the September of summary of economic projections.
And so when you think about what the market had been priced for, and what it's priced for now, we've basically taken out one cut from the market pricing and it's pretty much well aligned with the Fed's expectation for around 50 basis points of cuts in 2025. And the move higher in yield that we have seen is consistent with the re-pricing of Fed expectations, not only to a higher policy rate, at least relative to prior to that meeting, but also a higher longer run policy rate, which moved up to 3%, according to the longer run diet. And I think you're starting to see that really as part of the bear steepening of the curve, the re-pricing of longer run expectations alongside this increased pricing of fiscal risk. And we just put out a note kind of highlighting that how from mid September to mid November, you had rising real yields alongside economic surprises to the upside.
So just looking at whatever your favorite economic surprise index is, whereas since the Trump and unified Republican government victory became apparent in mid November, we've seen US economic surprises shift lower while yields have continued to rise. So we think you're starting to see more fiscal risk priced in alongside a re-pricing of the path of monetary policy. So you've had yields come up quite a bit when you were at around 470 on the tenure as we record this. Our year end target for 2025 is 475.
So not a lot of room are not much needed up from where we are today to hit that target. And I think when we put together this forecast, we envision a scenario where we probably overshoot that forecast at some point. If we get through 5%, maybe we get to 5.5%, but I think that ultimately the risk associated with rates that high and probably demand for duration, those attractive valuations probably push the yield back down. So you've had a big re-pricing of the Fed.
I think there's been a re-pricing of fiscal risk. And while the market is essentially priced for what the Fed expects in 2025, the market has a much higher terminal rate. And that kind of fits a little bit better with our expectations going forward. Our call, and I think we'll get into this in a little bit more detail, is for essentially no cuts in 2025.
We laid out a path where either the Fed continues cutting and the first part of this year, and eventually reverse this course, that feels less likely based on the updated forecast we got from the Fed. It feels like their content to stay on hold for the time being and let the fiscal policy implications play out as they might before making future adjustments. And so I think that to get to this unchanged Fed funds target range by year end is probably this extended pause as the second scenario that we had considered in our outlook. All right.
So now we are in cut and chill mode with the Fed. And here we are. It's chilly outside today in Charlotte, and the Fed is probably going to be a bit chilly, at least at the January meeting. Zach, as a child, did you ever think that you would be someone who has a favorite economic surprise index that you would monitor?
I did not have that pegged for myself, but it's become very clear that that might be the least nerdy thing in my repertoire these days. We have to embrace our full selves. That is for certain. All right.
All of the gyrations in the rates market, what's been going on in US investment rate? Anything notable? Jump out at you from the December price action in the US IG. Short answer is not much.
We have had spreads in aggregate, widened just a couple basis points driven more by the front end of the curve and kind of the front end of the belly of the curve that one to three year and three to five year segment. If we look at the recent very modest widening, it's been pretty evenly distributed across rating buckets. And so I think you're just starting to see signs that further tightening from here is unlikely. And we certainly didn't envision spreads getting as tight as they are today in our base case for 2024, even though we certainly had looked for a supportive market and spread tightening.
We got even tighter than we had anticipated. So I think you're starting to see early signs of concerns about fiscal policy. I've kind of already outlined that and maybe just a lack of a tailwind to high quality fixed income markets in 2025 from an expectation of much greater monetary policy easing. I think that was a big driver of supported performance in 2024.
So it's early innings. Of course, we have a wider spread target for IG in 2025 looking for a move to 110. And while that would be a notable move, I think around 82, 84 basis points as we record 110 basis points historically is not a wide range. And so we're really looking for that to be driven more by just a recalibration of fundamental concerns and maybe a downshift and some of the tailwinds that we saw versus throughout 2024.
So with that, when I look to turn it back to you to kind of get your impressions of the latest moves in the leverage finance markets since we published our outlook in early December and how that fits with our overall outlook for 2025. Yeah, left thin was really interesting in December because we saw that trade out of fixed and back into floating in full effect. This was evident in retail fund flows with very strong inflows into loan products. Whereas fixed income had a little bit more challenges, especially on the high yield side of things.
And I would say overall, you know, the markets held in pretty well after the November rip fest that we saw, especially for triple Cs, they had positive high yield returns in the month of December. They were the only high yield rating cohort to have positive total returns in December as high yield in general ended December on a little bit of a weaker note. We saw spreads widen about 20 basis points over the month and yields rose 34 basis points as those treasury yields claimed and that resulted in negative point four percent total return losses for high yield. Now, even so, even with that not so great December performance, high yield was up 8.3% on the year in 2024.
So a very solid showing, especially coming off of a very strong 2023 and especially all of those gyrations that we saw in the rates market. The broadly syndicated loan market fared even better last month, prices rose driving up monthly total returns of positive point six percent and that helped edge out high yield for annual total return performance at 9.1%. So I think that's the fourth year in a row of loan versus bond out performance, which is very much an anomaly when you look back at the long term historic trends that loan out performance was very much driven by that strong November and December action in the loan market amid rising US treasury yields and more of a preference for floating rate asset classes. I'd also mentioned the primary market for the BSL market remained truly insane in December.
All of our colleagues on the LFI team who are very actively covering the new issue market in the BSL market and also private credit had very little holiday time, at least in the first couple of weeks of the year, as we saw just an amazing pipeline of December issuance, especially as it related to reprisings and and then to and extend activity. So Logan, I want to go to you now. You talked a lot about the US rates market, what's happened in credit markets in the US. How does that compare with the December action in Europe?
Yeah, I mean, so on the surface, it looks like not a whole lot has been going on within Europe, but if you look really kind of under the hood, it's actually been the markets basically been racing to kind of figure out how the new US political leadership is going to impact the macro environment for Europe corporates, obviously from a fundamental standpoint, but also what tariffs might mean for the path for ECB policy rates. So that's why I think really where the market's at right now. Our view heading into 2025 was that the rally in European rates, we had seen kind of the post US election was looking quite overdone and it wasn't really what are not terrorists were going to be implemented, but more so the fact that underlying inflation pressures across Europe continue to persist. And of course, in mid December, we did get another ECB rate cut cutting rates for by 25 basis points for the fourth time of the cycle in mid December, although this was already kind of largely priced in.
So not much of a market impact from from that decision. And actually, since we since that meeting on December 12, we've actually seen the boom yield curve bear steeping out quite, quite meaningfully, which is obviously in short contrast to what we had seen kind of post election. But even the two year boom, which had rally pretty pronounced, you know, post, post elections has actually jumped nearly 25 basis points since the ECB cut rates in December. So we're definitely seeing somewhat of a hawkish recalibration since our outlook was published, which is what we had been calling for heading into this year.
Another key development that we've been focused on is persistent weakness in Euro currency versus the dollar. The Euro basically hit two year lows just at the start of January last week. And I think this has been driven by a handful of kind of moving factors and uncertainty as being one, you know, the rather weak economic outlook for Europe now complicated by the potential for US tariffs on imports from Europe. Number two, which is, you know, I previously mentioned is around expectations at the ECB.
We'll need to cut rates to alleviate the impact of tariffs regardless of what the Fed might do this year. So that's certainly putting some downward pressure on the euro versus dollar. And then the third key development and this is something I think is going to be definitely closely watched and assessed this year is around political uncertainty. And Europe, you know, the political outlook appears to be rapidly changing as there are several key elections this year that we'll get into later on the podcast.
But also the potential for more elections to even spring up, given kind of mounting political pressure on incumbent governments following, you know, several years of behind inflation. We are certainly seeing kind of the trend of political uncertainty remain a key impact to the macro environment here in Europe. And then in terms of credit spreads, you know, the European market has generally been somewhat range brown since our last since our outlook was published in December. You know, the volatility has been pretty low.
Like I mentioned at the start, although the bias has definitely been towards spread, spread tightening throughout most of the past month. You know, right now we basically see spreads as price for perfection. And while the technicals remain really strong at this point, you know, we think at some point there's going to be a handoff towards fundamentals, we need to see improving fundamentals required to really keep spreads in the current range. So not sure how much improvement we're going to see at least in the first two quarters of this year, just given the host of uncertainties both domestically and geo politically.
So that's kind of how we've seen the market change over the last month or so. Yeah, lots going on kind of in the headlines and especially in the rates market, but that European credit market has felt pretty unshakeable as of late, which is really interesting, especially with some of the headlines around the automakers. Logan, so you know, you have moved to London, but you spent the holiday season back here in the States in Charlotte and DC. Did it feel different?
How was it being back? It was a bit nostalgic to be quite honest. Definitely have definitely made a lot of kind of big life changes in terms of getting acclimated so you're up and coming back to the US was quite a quite a shock to see how different both kind of the cultures are differences and similarities, but it's nice to at least be able to spend time with family and friends over the holidays. And we certainly enjoyed having you in the Charlotte office for a day in December.
It was nice to have the band back together. All right, so let's look ahead at January. I think some of my highlights, I will be embarking on a little bit of a mini world tour. I will be heading to Paris, London and Toronto because nothing says wonderful like a trip to Toronto in January over the next couple of weeks to do the Fitch series of outlook conferences.
These are always so well attended and I really enjoyed doing them. So despite the potentially frigid weather in a few of these places, I'm really excited about that. And Logan, of course, I'll get to see you when I'm in the London office as well. We also have the presidential inauguration.
We have moved past January 6th where we have the counting of the votes and confirmation that the inauguration is going to move forward without any big issues. And I will be really interested to see how the Trump administration, you know, embarks on its first 100 days. It seems like there are a lot of plans in place to get policy rolling very quickly. And I will be wondering whether we're going to see watered down versions of the campaign promises.
There was a post article about tariffs and how they're going to be universal, but only on select kind of domestically important industries. And then also what's going to happen on the immigration front. It will be definitely an interesting January and February from a political perspective. And then we also get back to the economic data this Friday.
We have the December payrolls report. Clearly the labor market has been a moving target for the market and the Fed over the past few months with very noisy data disrupted from hurricanes and just kind of broad based deceleration and hiring and then some better than expected data. And so it'll be interesting to see how that kicks off the year and kind of what the tone is going to be. We have a repeat of the beginning of 2024 when the data seemed kind of unshakeable.
And then we get to that January FOMC meeting at the end of the month. It will be interesting to see if the Fed actually does just chill out in January. Hold rates steady as they wait to see how the year kind of unfolds. Zach, what are you looking for in the near term?
What are the things that you are most excited about? Yeah, I think it's going to come down to the non-farm payrolls report this week, CPI next week. Your point about data around this time last year being unshakeable, the thing that really sticks out to me is inflation was stickier than we and many others had anticipated that really delayed the Fed's shift into policy easing into much later in the year. And so I think that's something that we're certainly keeping a close eye on.
And even today just with the the Joltz data showing job openings coming in above even the highest economist estimate and you're seeing the curve bear sleep and pretty substantially in response to that. I think highlights the importance of the labor market in terms of the Fed's thinking and the markets reaction function to the data that we're facing right now. I think we have seen a notable shift from the Fed to focus on the labor market. Not necessarily away from inflation but bringing it more even with inflation in terms of its policy considerations going forward.
So we'll certainly be keeping an eye on labor market measures and with respect to the move today and how much we can extrapolate that to what is going to drive the market in 2025 as some prices paid also came in quite a bit above expectations. So it's not really only a labor market story helping drive the recent bear sleep in the curve but inflation concerns as well. So that will be squarely our focus. Winnie and I think one of the big things that was a driver of strong performance last year was the technical tailwind, a lot of focus on yield buying even though we really didn't see the move out of cash products.
I think if we see the Fed and maybe other major central banks either not ease as much or keep policy on hold, some of that technical tailwind may be shaken and actually there'd be more demand for cash products and environment where there isn't that clear monetary easing bias. So those are the key things that I'm kind of keeping an eye on and we'll get some important data points in the next couple of weeks and then of course to see how that impacts the tone from Chairman Pollack January. We won't get an update on some of the economic projections but certainly getting a sense for how these data points fit into the overall forward guidance that we get in the policy statement and the press conference. Yeah, lots in January for sure to be focused on.
You'll have to shake off the rest of the holiday season. Logan, how about for you within Europe and the sterling markets? What is top of mind for January? Yeah, I think the number one focus in Europe is certainly going to be on President Trump's first days and weeks in office.
What issues the administration decides to tackle first and whether he ramps up the trade war story that's been long talked about since he won the election in November. I think this undoubtedly cast the widest net across Europe compared to all the other sort of developments that we've been talking about. So certainly that's number one and we're going to be obviously scouring kind of the headlines and potential trade proposals for details around what that looks like. But right now it still feels all over the place.
I think investors are scrambling to figure out what the read through is on European corporates. I think that's the number one focus for us in the next couple of weeks is going to be on that how that transpires. But more status quo events at the end of January will have the ECB will kick off its first policy meeting of the year. Rate futures are basically pricing in a full 25 basis point cut at that meeting with the ECB likely to lower the deposit facility rate to two and three quarters.
So that's down from 4% of the highs last year. This is basically in line with our view of the ECB with front load rate cuts this year. But it's likely to pause in the second half at around 2% on the deposit facility rate. So I would expect to see the ECB kind of remain in this sort of wait and see mode as it relates to the potential impact of tariffs and what that means for the path of inflation.
Looking beyond the next few weeks, the German elections are right around the corner following the no confidence vote and the solution of parliament in December. Those elections are scheduled for February 23rd. So still quite a bit out. But I think that's going to be something that certainly is going to get renewed interest in the coming weeks, clearly given the moving parts around global trade policies, ongoing conflicts in Europe in the Middle East, as well as stubborn inflation domestically coupled with we've seen very weak growth in Germany over the last couple of years.
I think this outcome certainly could shift the direction of travel for the German economy going forward, which is like I mentioned, struggled to really generate any sort of growth for several years now. So those are really the three main things. And then you obviously have big focus from investors on the new issue supply. I would expect that to be quite heavy, at least in the first part of January ahead of Trump's inauguration.
I think the issue is certainly looking to get ahead of that. And we've seen rates moving higher. And I think that certainly incentivizes issuers to basically finance themselves pretty heavily in the beginning of the year. So those are what we're really focused on in your term.
Yeah, that's super helpful. And the new issue market in the US has absolutely opened the year on very strong footing as well. In fact, in the US, on the credit side, we are revamping some of our new issue coverage, including a new weekly product that provides information around supply and demand statistics for deals that price that we've before to try to help people set up for what is coming in the next few days. So one thing that we get asked at pretty much every meeting we do is, how are you a contrarian?
What are your contrarian calls? And I think that the top contrarian call that credit site strategy team has as a whole is we're underweight most credit risk in 2025, which to be honest, is not a place that we've been very frequently for the past few years. We have been contrarians and being very bullish on the market, but now we're just looking at the balance of valuations upside and downside and spread, some potential for more volatility this year, driven by perhaps shifting fundamentals and technicals. We did go underweight credit risk at kind of the tights in spreads for USIG and high yield, immediately following that November rally after the election.
Zach, how are you thinking about our contrarian calls? Where do you think we are standing out as contrarians? I think your first point about being underweight is huge, and that's definitely not the consensus takeaway from our conference in December. Any clients, client meetings we've had since, there does seem to be quite a bit of optimism.
Still, and the other huge one is our Fed call. No cuts on that this year, and I think that's gotten some pushback from clients. But if anything, we feel emboldened by this call based on the updated summary of economic projections from the Fed. Obviously, they haven't fully converged with no cuts in 2025, but the Fed's projections notoriously have not been accurate with respect to what monetary policy is eventually implemented.
I think the shift has been in our direction. I'd say our call for higher yields, which as we noted earlier, not much higher than where we are today, that was also a contrarian call based on the discussions that we had at the outlook. Those really stand out if anything. Those have been decent calls over the past month, but it's a 12-month call.
I'm sure it's going to be a very bumpy road along the way, so we're not petting ourselves on the back yet. But so far, I think that the positioning that we recommended in early December has been a good spot to be up to this point. I'm always fascinated on the pushback that we get because people tell us, well, the market's been great, so it will continue to be great. That's an interesting one.
And then also, there's this dynamic of, oh, spreads can't widen when yields are so high. And then when we look back and run the analysis, spreads historically have not been this tight when yields have been this high. And so I think people need to take a closer look at the data and the different scenarios and probability of those scenarios unfolding. And complacency and status quo cannot be the path forward in 2025.
How about for you, Logan? Where are we, contrarians, on the European front? Yeah, I'd say one of the views that we took, and I've seemed to be a perma bear on sovereign rates. And I think you expect to see European sovereign yields move higher over the course of 2025.
Our view is that in aggregate, Europe's likely do not be in a recession this year. And yet we think re-inflation pressures are not being fully appreciated, particularly considering the potential impact of tariffs. So I think you couple that with ongoing political uncertainty, what looks to be like stretched government deficits and across a lot of various kind of coronations in Europe. We think that that combination really means rates are likely to move higher from here.
It's clearly like Zach mentioned, it's not likely to be kind of a straight path there. But I think interest-free volatility is going to remain a key theme in 2025 in terms of, I think that's going to be something that investors are closely focused on when they're trying to make decisions for how to be positioned around duration. So I think at this point, we are sort of maintaining our cautious view on duration, which if you looked at the futures curve heading into this year was basically looking for kind of lower sovereign, the German boom yields this year. I think we're taking a bit more of a cautious approach on adding duration here.
We think actually that the ceiling, particularly for the long end of the yield curve, is actually still quite a bit higher from here. So expect continued volatility around the rate side of thing. Well, I want to jump in here, Winnie. I got to give Logan credit in 2023 when yields are starting to move higher, particularly here in the US.
I was certainly at the camp that we were going back to 4%, before 5% and Logan was in the 5% camp and he ended up being right. So I think this duration call needs to be appropriately factored in and I got to give him credit for that one. So I've certainly come around to the view that we're probably moving higher from here. And so remaining cautious on duration, I think, is a good place to be, at least for now.
I appreciate it, Zach. Yeah, that's great. Zach, I was also thinking that when Logan was saying he's been a permabear on rates, I was like, oh, yes. I remember very vividly the permabearness.
And how we all got started. So I want to take a quick second just to talk about what do we think is going to be the biggest market driver in 2025? I think we can all safely say in 2024 it was technicals, right? That supply and demand dynamic was unstoppable across a host of asset classes, including corporate credits.
And how do we think that that is going to stay the same or shift in 2025? Logan, I'll let you go first here. Yeah, I mean, at this point, I think it's definitely tariffs and trade. I mean, that's the number one, like I mentioned earlier, and I think that has obviously the biggest risk to fundamentals.
But I think also how European countries and corporates really respond to what's shaping up to be some pretty tough trade negotiations ahead. I think that's going to be critical for the market. I think there are some levers to pull on the trade table, but it'll be really interesting to see how they sort of shakes out once that sort of debate starts up. I think it's not only focused on the US, but also trade negotiations with China, Tukkala around EVs, Lattam with the new trade deal that was announced last year.
There's a lot of different moving pieces when it comes to the global supply chain. I think that's going to be of some serious focus this year. I think all of the time, I think it's going to be a lot of the global supply chain. Obviously, it has a potential to reignite inflation pressures as I think a breakdown of trade agreements would likely come at the expense of higher consumer prices.
Obviously, higher inflation would be quite disruptive to credit markets. Certainly, I mentioned we're going to be scouring upcoming trade headlines and proposals to figure out what is the ultimate read-through for European markets. But right now, it's still a bit early, but I think it's something that we think that's going to be the key focus this year. On top of obviously a million other things.
A million other things for certain, Zach, of those million other things. What do you think will be the top market driver in 2025? I'll keep it short and sweet. I think really what Logan hit on.
I would just call it the fiscal policy mix. We've been saying for a while there seems to be more optimism with respect to deregulation, and at least the extending of tax cuts, if not the deepening, and perhaps a glossing over of tariff and potential for mass deportations. I think mass deportations is more difficult, but on the tariff side, that seems like something that President Trump has a lot of ability to implement on his own. As you pointed out at the outside, when we got a headline that they might be dialed back, he very quickly posted that that is not the case.
To the extent that the market is underpricing that likelihood, I don't quite understand it. Maybe the market is more resilient. I think the key risk is that technicals win again. I don't think we haven't dismissed that, but I think some of the shifting dynamics with respect to monetary policy and the fiscal policy mix make it more vulnerable to not being the key driver in 2025.
Yeah, I think that's a great point, Zach. On the technical side of things, given how robust the retail inflows were across, especially U.S. asset classes last year, you now have a much higher concentration held by ETFs and mutual funds, which are far less sticky than the big institutional investors. You generally don't see the life insurance companies and the pension funds aggressively selling when things start to get a bit choppy.
But retail funds do, especially if you see total return losses mounting over the course of a couple of months. I think that's a big risk that needs to be appreciated by the market. Those retail flows, they can be very powerful on the way in, but they can be even more damaging on the way out. I would say that for 2025, the big driver for me is going to be a shift away from status quo and into status quo.
Who knows what that was going to be? Is it going to be a good low, a bad low, kind of a mix of all of those things? It's going to be a really interesting year. And the strategy team is standing by waiting to cover all of the unfolding events.
All right, let's wrap it up there. Zach and Lowion, thank you so much for joining me today for our kickoff for the 2025 season of the Credit Sites Podcast. Thank you also, everyone who's listening in. If you have feedback, questions or comments, you can always reach out to us using the Ask An Analyst function on the credit sites dot com website and best of luck to everyone in 2025.
I hope everyone has good health and prosperity. And we will be back in the next few weeks covering a range of topics in EM. The legal side of things, looking at some specific sectors. It's going to be a really great year for the podcast and credit site strategy as a whole.
Thanks again, Logan and Zach. Credit Sites is a slayer. All rights references correspond to the data this recording. This podcast should not be copied, distributed, or reproduced in whole warden part.
And it provides sites and more resilience. It makes any representation or word to you as to the accuracy per completeness of any information contained in this podcast. Credit Sites is not providing investment, legal, attention or tax advice. It's not providing research or making any recommendations nor statistics offering or soliciting any transaction with respect to the purchase or sale of any security.
The receipt by this listener of this podcast is not the giving other credit sites for its ability.