Winds Set Fair For Fixed Income In 2025

An investment figure predicts what”s in store for credit markets, an area that has expanded rapidly in recent years, partly in response to a tightening of banks’ willingness to lend in the aftermath of the 2008 financial crisis and new capital rules.

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Central banks are going to be able to navigate a soft landing,
and in that environment, Tim Crawmer (pictured) at US-based
Payden &
Rygel, expects strong economic conditions, robust employment,
and declining inflation. 

Crawmer expects 2025 to be a good year for fixed income,
following two strong years in 2023 and 2024. If his soft-landing
forecast holds up, he thinks investors will be rewarded. He
expects all-in returns on investment grade assets in the 5 per
cent area. He is overweight quality and liquidity in how he
holds market positions. “Spreads have narrowed to the point where
you’re not getting paid to take on the risk of lower-rated or
less liquid bonds,” according to a note. 

Other wealth managers like Boston-headquartered State
Street Global Advisors, the asset management arm of State
Street Corporation, also retain their favorable outlook for fixed
income in 2025. See more commentary here.

Inflation returning main risk to fixed income markets

Acceleration of inflation is the obvious risk out there, but
that’s not Crawmer’s base case. He expects inflation to fall. “A
lot of the noise out there around inflation is just the bumpiness
that’s natural with inflation as it comes down or goes up.
There’s going to be big lag effects on inflation because there
are some parts of the contributors to inflation that take a lot
longer to work themselves out, for example, the housing market,”
Crawmer said.

A problem for any predictions on inflation is that a US Donald
Trump administration with control of Congress passes an
inflationary agenda like tariffs, lower taxes, curbs on
immigration, and presides over higher fiscal deficits. Crawmer
expects the actual Republican agenda to be less inflationary than
feared by the markets. However, if the agenda does come to
fruition in a manner that’s a lot more inflationary than what he
is expecting, the result could be a reacceleration of inflation
that would be problematic for fixed income markets.

Quality and liquidity remain attractive

Crawmer is positioning himself with an overweight to credit
across all strategies. He thinks central banks are going to be
able to navigate a soft landing. In that soft landing
environment, he expects strong economic conditions, robust
employment, and declining inflation. That’s good for credit
across the board.

Even though Crawmer is optimistic about the outlook for the
economy and the soft landing, investors won’t get compensated if
they go down in quality and down in liquidity. He’d rather carry
his overweight to credit via safer, higher quality parts of the
market that would have less downside if something unforeseen
happens.

Value in regional bank debt

“In investment grade, corporate fixed income, the new
administration will benefit banks,” Crawmer continued. “Less
regulation on the banks allows them to be more profitable. Also,
the banks will benefit from a stronger economy and lower
corporate taxes will benefit the smaller cap and more regional
businesses.”

“The specific banks that would benefit from that would be those
regional banks that operate more in a geographically concentrated
area, like the Midwest, or have a focus on middle market
businesses. They are trading cheap versus other banks out there
and should benefit from a Trump administration and a Republican
Congress and Senate,” he added.

Outside of that, there has been a lot of yield compression
between the sectors. “There isn’t a lot of low hanging fruit
where one sector is trading significantly cheaper to the others.
That means that when you pick your sectors, you must be more
cognisant of what the downside could be than the upside. You want
to be wary of cyclical or historically more risky corporate
sectors,” Crawmer said. “For example, in communications/media
areas, where there is a lot of potential for merger and
acquisition, sponsor, and private equity activity that could
cause spread widening. Those are the areas where you could see
some spikes in volatility and some downside,” he added.

Issuance will be steady – but watch M&A

Crawmer thinks it’s going to be a standard year for issuance,
close to in line with this year. Most of it’s going to be
refinancing activity as issuers just continue to refinance any
near-term maturities. That said, there is the possibility of more
merger and acquisition activity that could drive issuance up with
the Trump administration, which is likely to be more lenient in
regard to approving M&A than what has been seen under the
Biden administration. 

Municipal bonds still attractive, especially in high-tax
states

“Muni” bonds will be a relatively safe place, Crawmer said. Munis
fall into the higher quality part of the market that Crawmer
likes.“However, the sector has compressed [in yields versus
government bonds], so there’s not a lot of free money to be made
in municipals. Lower taxes could steer some money away from
munis. But overall, they should hold up well, especially in
high-tax states,” he concluded.

With $163.8 billion under management, Los Angeles-headquartered
Payden & Rygel is a privately-owned global investment
advisor focused on fixed income and equity portfolios, with
offices in Boston, London, and Milan. It provides investment
strategies and solutions to investors around the globe, including
central banks, pension funds, insurance companies, private banks,
and foundations.