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Fed's hawkish stance affects corporate bond spreads

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Trump's policies may increase market volatility and

inflation

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Record bond issuance expected in early 2025 despite

volatility

By Matt Tracy

Dec 23 (Reuters) - It could be a bumpy ride for U.S.

corporate bond spreads in 2025, with investors and strategists

expecting more market volatility, as the new Trump

administration implements a reform agenda that could be

inflationary and slow the pace of U.S. interest rate cuts.

Corporate credit spreads, the premium over Treasuries that

companies pay for debt, widened last week after the Federal

Reserve's December meeting.

The Fed cut interest rates by 25 basis points but Chair

Jerome Powell expressed caution about further reductions without

seeing progress in lowering stubbornly high inflation.

The widening of spreads on Thursday followed a rise in

Treasury yields after the Fed's hawkishness.

Strategists expect this pressure on spreads to persist as

they see demand moderating for corporate bonds, which drove

spreads to their tightest in decades this year.

"We expect demand to moderate somewhat in 2025 given the

expectation for rates to remain elevated," said BMO credit

strategist Daniel Krieter.

He expects this moderation in demand, alongside struggling

corporate fundamentals and volatility as Trump takes office, to

send credit spreads wider in the new year.

Krieter expects investment-grade bond spreads to touch a low

of 70 bps in the first quarter of 2025, from 82 bps on Friday,

and a peak of 105 bps by the end of next year.

"A lot of the policy that's out there right now is

inflationary, or is expected to potentially be inflationary. It

certainly leans that way," said Nick Losey, portfolio manager at

Barrow Hanley.

The uncertainty about the impact of the new administration's

policies on markets is now expected to push companies to bring

forward their debt-issuance plans to the first quarter.

Some strategists predict investment-grade bond issuance next

month to touch between $195 billion and $200 billion, and to set

a record, beating $195.6 billion in January 2024.

Junk bond issuance in January is expected to range between $16

billion and $30 billion, said one strategist. This compares to

$28 billion this past January and $20 billion in January 2023,

according to JPMorgan data.

"We're expecting January to be a busy month as long as the

secondary market continues to look welcoming towards issuance,

which I would argue is still very much the case right now, even

with the little hiccup we've had the past two days," said Blair

Shwedo, head of public sales and trading at U.S. Bank.

Demand for these new bonds will remain robust as returns on

corporate bonds could be attractive in 2025 despite potential

volatility, said Andrzej Skiba, head of BlueBay U.S. fixed

income at RBC Global Asset Management.

"The good news is that unlike in awful 2022, the starting

yield level for the asset class is high. Even if both Treasury

yields rise further and credit spreads widen, you're still

likely to have at worst a flattish total return on a

forward-looking 12-month basis," Skiba said.