European investment grade corporate bond spreads defied the odds this year, grinding tighter despite a litany of reasons that should have driven them wider. Expect the same next year.
The iTraxx Europe Main opened at 53bp on Tuesday to mark a 9bp tightening from where it opened on January 2 and a 37bp tightening from the highs of the last 12 months.
For much of this year, investors have been convinced that spreads were going to widen. Coming into 2024, multiple investors told GlobalCapital that they were certain spreads would move at least 20% wider during January alone.
It did not come to pass. The wall of cash pouring into investment grade credit funds – with every week but one this year seeing net inflows – made sure of that.
Now, it is starting to look like next year will see the same dynamic, only turbo charged.
There are three main reasons why 2025 promises to tighten the screws on European credit spreads even further.
Firstly, is that this year was the year of the election, globally. More than half of the world will have gone to the polls by the end of 2024.
Despite plenty of worry at the start of the year – does anyone recall when fears rose that Taiwan’s January election would derail European IG if the result came out anti-China as it did? – there has really only been one election flashpoint this year that has rocked European credit markets, and that was the rise of the far right in France.
This petered out quickly, and France’s political equilibrium, and the bond market’s, returned within the space of a few weeks when the country went to the polls at the end of June and early July.
Next year has none of this background noise. One tick for spread tightening.
The second major factor is the potential winner of the US presidential election on November 5.
Kamala Harris has a narrow lead in the polls over rival candidate Donald Trump.
Harris’s carrot approach to trade compared to Trump’s stick will keep European companies competitive with US firms. And on Monday, Harris’s team said she would back her predecessor Joe Biden’s plan to raise corporation tax from 24% to 28% in the US.
Among many other effects, this will likely raise US credit spreads and tighten European ones.
Analysts at ING agree, noting that a Harris victory would be the best outcome for European credit spreads.
Finally, the much considered refinancing wall that was due in 2025 has now largely disappeared.
The $2.8tr-equivalent of global refinancing to be done has been pushed back to 2028, according to S&P Global, as issuers spent the year taking advantage of the higher than expected investor demand for debt.
This means that there won’t be a big chunk of refinancing volume in 2025 to soak up all the extra liquidity.
“How can spreads get tighter?” was a common refrain at the beginning of the year. They have easily slid 9bp tighter since then. Just because they already seem to be defying gravity doesn’t mean they can’t continue to do so.
Day to day, spreads are subject to the whims of the market, but over the next 12 months, the evidence is stacking up to suggest that coming into next autumn’s busy period, they’ll be another leap tighter than they are today.