Real policy rates have moved from deep negative territory to the highest levels since before the global financial crisis, providing central banks with the flexibility to start easing. Although prudent rate cuts are necessary to underpin growth and ensure a soft landing, the exuberance of rate markets is questionable. Markets are now pricing in a faster easing cycle than previous crises, which seems at odds with an economy that is still growing and an equity market close to record highs.
Global rates: time for a reality check
Global inflation: the best news is behind us
Credit: time for active managers to shine
High yield credit: the power of compounding
We believe factors such as the shift from globalisation to deglobalisation will keep inflation structurally high in the coming years. In the US, sticky inflation, monitored by the Atlanta Fed, is declining at a slower rate than the headline consumer price index and has stabilised at around 3%. Stickier inflation is just one of the challenges facing central banks, with food prices and money supply turning upwards once again.
Robust investor demand has compressed spreads to below long-term average levels. Despite this, absolute yields remain high relative to the past decade. This environment presents a unique opportunity for active managers to enhance returns beyond yield alone. High levels of issuance should provide ample opportunities for stock selectors to capitalise on new issue premiums and unique investment stories in 2025.
High yield credit is particularly suited to compounding returns over time, with market yields high enough to amplify the power of compounding. High yield corporates have weathered the sharp increase in interest rates over recent years, and defaults in the current cycle are at relatively low levels.
Deep dive into the full 2025 outlook