AXA Investment Managers (AXA IM), winner of multiple Asia Asset Management’s 2025 Best of the Best Performance Awards1, including US Credit, Investment Grade (5 years) and US High Yield (3 years and 5 years), sees distinct opportunities in US high yield and investment grade bonds amid shifting economic conditions.
According to AXA IM, the end of the low-interest rate era has allowed high yield bonds to assume their proper role in a balanced portfolio: providing unique diversification and the potential for equity-like returns with considerably less volatility. Conversely, US investment grade corporates are expected to benefit from a decent macro environment in 2025, as economic growth should support earnings momentum and cash flows of the issuers.
Michael Graham, head of US high yield and senior US high yield portfolio manager, anticipates the US economy will likely face two different scenarios in 2025, both poised to support high yield bonds.
“Our central scenario remains that the US economy will continue to grow over the next couple of years, but at a slower pace,” Graham tells AAM. He believes this can offer a “potentially constructive” environment for US high yield companies as they should have enough room to operate and grow revenues.
Market spreads and structural shifts in high yield
While spreads are still tight relative to long-term averages for high yields, Graham expects the average spread for the next 15 years to be lower than the previous 15 since the 2008 global financial crisis. This is due mainly to structural shifts in high yield, including improvements in average quality, accessibility to capital, and overall liquidity as a result of new trading techniques. Indeed, given the benign default rate and strong fundamental and technical environment, Graham sees good reasons why spreads remain supported at current levels and would view any widening due to macro or geopolitical events as “a potential buying opportunity”.
Positive fundamental themes continued
Speaking about market fundamentals, Graham believes many positive fundamental themes from 2024 will continue into 2025.
Distressed exchanges are likely to dominate the headlines throughout the year. Other key themes include sector trends continuing to diverge in line with an uneven economy, and defaults remaining below long-term average.
There are also positive signs across US leveraged finance. Investors’ persistent interests in rising star/fallen angel dynamics, as well as rising mergers and acquisitions activities, broader capital access across leveraged finance space, and the rebound of capital flows into high yield will be key drivers, according to Graham.
As for investment grade, Frank Olszewski, head of investment grade credit, says that yields on short duration bonds will remain attractive relative to cash and other asset classes.
Meanwhile, the firm continues to target a yield advantage relative to the one-to-three year index and yield levels remain above policy rates and well above prevailing and expected inflation rates.
Attractive yields amid declining cash rates
Whilst bond yields have been rising, cash rates have been declining due to the combined 100 basis points of cuts by the US Fed in 2024. “Put simply, in our opinion, cash rates now look less attractive due to monetary policy moves, whereas bond yields reflect market expectations relative to future policy rates,” according to Olszewski.
Amid the macroeconomic noise, both portfolio managers emphasise the importance of staying disciplined in the fundamental credit selection process.
Whilst the macro picture remains clouded in uncertainty, Graham concludes that “the micro picture continues to offer a much more favourable and nuanced environment for bottom-up investors whose principle focus is identifying those trends.”
1 Source: Asia Asset Management, as of February 4, 2025. Awards methodology is based on the fund’s 3 years and 5 years cumulative performance ending September 30, 2024.
