January 2, 2025
David Crall, CFA
CEO & CIO, Nomura Corporate Research and Asset Management Inc.

US High Yield

US high yield returned -0.43% in December, bringing the YTD return to 8.20%, according to the ICE BofA US High Yield Constrained Index (HUC0). As markets continued to digest expectations for growth, inflation, Fed policy and the incoming Trump administration, Treasuries sold off during the month and spreads widened modestly. The Fed cut their overnight rate in mid-December, bringing the rate to 4.25% to 4.5%, but tempered expectations for further cuts next year as growth remains stable in the 3% area, and inflation remains above their target at 2.82% for Core CPE on a LTM basis. In addition, the Fed may be quietly viewing Trump policies as potentially inflationary, though they deny putting weight on unknown future policy actions. Overall, a somewhat less dovish Fed led markets to pull back, and the 10-year Treasury increased by 40 bps to 4.57%, while US high yield spreads widened by 18 bps. BBs were the worst performing rating category on Treasury sensitivity, while CCC’s were the best, continuing the pattern of 2024. Broadcasting and Insurance were the best performing sectors, while Cable TV and Building Materials were the worst.

For 2024 overall, growth exceeded market expectations thanks to steady consumer spending and business investment across many sectors including healthcare, utility output, energy production, and demand for IT equipment and Artificial Intelligence capabilities. Inflation fell, but progress has stalled, and expectations for Fed cuts were pared back. The 10-year Treasury increased 69 bps for the year overall, while high yield spreads tightened 47 bps. US high yield ended the year with a yield of 7.47% and spread of 292.

Looking forward, NCRAM expects US economic activity to slow modestly in 2025, from near 3% real GDP growth in both 2023 and 2024, to the mid-2% range in the coming year, with some risk to the upside. Higher interest rates will impact some consumer spending, and growth is generally slow outside of the US. The policy impact of the Trump administration will be a key factor but is somewhat unknown. We continue to feel the incoming administration has a fairly large appetite for change, and aggressive ideas have been floated in the areas of taxes, deregulation, immigration, tariffs, and geopolitics. While Trump can undertake some executive action, there remains uncertainty about what will pass Congress with small Republican majorities. Overall, we’re hopeful that growth remains supportive for high yield. Deregulation, extending the 2017 tax cuts, and further initiatives to reduce the tax burden on companies and individuals would support stronger growth and higher profits. Lighter-touch regulation would also create a more favorable environment for mergers & acquisitions, supporting asset prices. On the other hand, protectionist trade policy and amplified diplomatic tensions are anti-growth and inflationary. Overall, NCRAM maintains a constructive outlook for high yield, driven by resilient fundamentals underpinned by continued earnings growth, supportive technicals, and attractive yields.

European High Yield

The European high yield market returned 0.69% in December and 9.39% for the YTD period, as measured by the ICE BofA European Currency High Yield Constrained Index (HPC0 in EUR, unhedged). December capped off a strong year for European high yield even as the Bund sold off in sympathy with US Treasuries, as spreads tightened 23 bps during the month. The main driver for positive performance continued to be recent new issues, particularly single-Bs that priced wide of index levels and also retain some convexity with trading prices below the call price. BBs also performed well, while CCCs struggled due to idiosyncratic issues. Technicals remained strong as new supply to the market was low due to the holiday period. European high yield ended the year with a yield of 5.77% and spread of 316.

As we look forward to 2025, we expect stable growth in the European economy, although we are watching risks that include geopolitical instability in Ukraine, political instability in Germany and France, energy prices, and the threat of Trump tariffs. We do expect inflation to continue to march lower and the ECB should steadily decrease their benchmark rate in the first half of the year. We see some policy divergence between US and European central banks as a key theme for the upcoming year, which could favor European fixed income assets. Default rates should continue to be low, excluding several large well telegraphed capital structures where restructuring is expected in 2025. As a result, while we do think European spreads are somewhat tight and could widen marginally over 2025, lower rates should offset a portion of that leading to another year of positive total return in the European high yield market.

Emerging Markets 

EM hard currency bonds delivered strong returns during 2024 thanks to the high-yield issuers which represent about 40% of the benchmarks, and our flagship EM strategies tended to tilt towards the high-yield credits. EM Corporate bonds, as measured by the JPMorgan Corporate Emerging Markets Broad Diversified Index (CEMBI BD) posted a -0.54% return in December and a +7.63% return in 2024. The high yield portion of the corporate index earned +11.67% return in 2024. Real estate, Transportation and Metals and Mining were the best performing corporate sectors in EM for the year. Technical factors remained supportive for EM Corporates with low default rates and moderate net new issuance. EM Sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG), declined -1.50% in December due to higher US Treasury yields but delivered a +5.73% return for the full year 2024. EM Sovereigns were also led by high yield credits which delivered +13.49% in 2024 driven by some CCC and B-rated restructured credits (Argentina, Ecuador, Ukraine) and defaulted countries (Lebanon). There were no EM sovereign defaults in 2024 and most of the small countries that defaulted during post-COVID years with rising US interest rates managed to restructure their bonds in 2024.

Disclosures

This document is prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and is for informational purposes only.

All information contained in this document is proprietary and confidential to NCRAM. All opinions and estimates included herein constitute NCRAM’s judgment, unless stated otherwise, as of this date and are subject to change without notice. There can be no assurance nor is there any guarantee, implied or otherwise, that opinions related to forecasts will be met. Certain information contained herein is obtained from various secondary sources that are believed to be reliable, however, NCRAM does not guarantee its accuracy and such information may be incomplete or condensed. Historical investment performance is no guarantee of future results. There is a risk of loss. Strategy performance references are based on gross of fees performance.

Certain information contained in this document contains forward-looking statements including future-oriented financial information and financial forecasts under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements. Although NCRAM believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that forward-looking statements will prove to be accurate. These statements are not guarantees of future performance and undue reliance should not be placed on them. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual performance and financial results in future periods to differ materially from those projected. NCRAM undertakes no obligation to update forward-looking statements if circumstances or NCRAM’s estimates or opinions should change.

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Performance data is calculated by NCRAM based upon market prices obtained from market dealers and pricing services or, in their absence, an estimate of market value based on NCRAM’s pricing and valuation policy. Performance data stated herein may vary from pricing determined by an advisory client or by a third party on behalf of the advisory client. Performance data set forth herein is provided for the purpose of facilitating analysis of account assets managed by NCRAM, and should not be used for the purpose of reporting or advertising performance of specific account portfolios to account beneficiaries or to third parties.

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