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Financial market outlook February 2025

Key findings

  • Interest rates/bonds: rapid series of ECB rate cuts expected
  • Equities: market concentration on the US equity market at historical highs
  • Currencies: recent weakness of the dollar is considered only temporary

Above-average break-even spreads for IG and HY

Due to central bank rate hikes in 2022 and 2023, break-even spreads on corporate bonds have increased and are now in the higher historical percentiles. Break-even spreads indicate how much bond yields can rise before the investment stops being profitable. A higher break-even spread means the bond can withstand a larger yield increase while maintaining a positive return. It is calculated as yield divided by duration. In developed markets, break-even spreads for high-yield (HY) bond indices in USD and EUR are at historically high levels compared to investment-grade (IG) indices. This is due to a significant decrease in HY index duration since 2022, caused by fewer mergers and acquisitions (M&A) and leveraged buyout activities, which typically involve issuing long-term bonds. Additionally, increased competition from private credit markets and the issuance of shorter-dated bonds have also contributed to the reduced duration. Meanwhile, USD HY indices offer the highest break-even spreads (70th to 80th percentile), while IG and EUR BB indices also provide respectable break-even spreads (40th to 60th percentile), indicating these bonds can still perform well even if there are unexpected rate hikes or market volatility. For February, we expect wider spreads for EUR HY but are neutral on USD HY and IG credit spreads. We expect lower yields in Germany at the shorter end and have a neutral view on government bond yields in the US and Switzerland.

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