Resiliency Remains for IG Credit
March 20, 2025
Last week, investment-grade (IG) corporate bond spreads were six basis points (bps) wider, though three bps better than the year-to-date wides set on Thursday. Corporate bonds are up approximately 1.7% year-to-date, while the S&P 500 Index is down over 4.0% for the same time period and down 8.22% from the all-time highs set in mid-February.1
The equity markets, in particular, seem to be expressing more unease about the impact of new Trump administration policies — most notably tariffs and the effect on future growth. The on-again/off-again nature of the tariff shifts have only added to the weakness. Meanwhile, IG credit spreads have remained relatively resilient. As displayed in today’s Chart of the Week, spreads — while weaker on the year — remain near the post-Global Financial Crisis tights despite the recent jump in economic policy uncertainty. The technical backdrop for IG corporate bonds remains supportive, with yields around 5.25% and still above the six-month average.2
Federal Funds Futures are now pricing in almost three interest rate cuts by year-end given the recent deterioration in business and consumer sentiment.3 Last week, airlines and retailers joined a growing list of companies lowering guidance and emphasized the difficulty of planning, including capex and hiring, amid the uncertainty. Following yesterday’s Federal Open Market Committee rate decision, the dot plot and Chair Powell’s comments appear to support the market’s rate outlook. In addition, it appears the Federal Reserve sees the labor market as in balance and will be proactive and not wait for weakness to materialize in the payroll data before beginning to lower rates.
Key Takeaway
Demand for IG corporate credit continues to be robust, and yields remain appealing. While spreads have experienced some weakness, it has been fairly orderly and benign compared to equity risk markets. Undoubtedly, there is more uncertainty to come regarding the economic growth path given the aggressiveness of the new administration’s policy to this point. Over time, I anticipate IG credit investors will somewhat adapt to policy uncertainty and concentrate more on the longer-term economic impacts. To the extent growth slows and progress on inflation is challenging, I expect corporate credit spreads to feel additional pressure.
Sources:
1-3Bloomberg
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