Global Credit Outlook: 1Q2025

Key takeaways

• Macro: We expect monetary policy “normalization” in the U.S., as opposed to significant “easing.” We see scope for deeper cuts from the ECB, given the weaker growth backdrop and trade risks. 
• U.S. consumer: While bifurcated, aggregate household balance sheets have benefited from a large wealth creation boost. This should support resilient U.S. growth, if the labor market remains solid.
• Liquid credit: The strong performance of corporate credit in recent months has reflected a combination of above-trend growth, less restrictive monetary policy, solid corporate fundamentals, and favorable technical tailwinds. While this “warranted resilience” has pushed spreads to the tight end of the historical range, we still see a compelling all-in yield opportunity in 2025.
• Private debt: The multi-faceted growth trends behind private debt should gain further momentum in 2025, driven by its expanding addressable markets of borrowers and investors. We expect private markets will play a role in financing some long-term structural shifts in the global economy. The sponsor-related M&A rebound we anticipate should provide an opportunity to deploy capital. 
• Real estate debt: The trend of “dispersion, but not disruption” remains in place. We see more downside for office valuations. 
• Risks to our view: Significant policy shifts are on the horizon. A scenario of widespread tariffs coupled with retaliation could weigh on credit spreads. This could also cause corporates to lean more heavily on layoffs to protect margins, which is a risk to U.S. consumer financial strength.

Spread vs. yield “tug of war”

As Exhibit 20 shows, most pockets of USD credit spreads are trading at the richest levels of the post-financial crisis era and are also trading tight relative to their EUR peers. But as Exhibit 21 highlights, the yield measures of most subsets of USD and EUR credit are much more attractive, by historical standards.

We expect this spread vs. yield relative value dynamic to persist into 1Q2025. We expect structurally higher interest rates, which should continue to support demand for corporate credit from yield-based buyers. And our base case of above-trend growth and normalizing monetary policy should leave corporate fundamentals well positioned to navigate this structurally higher cost of capital. Given the significant amount of pre-funding and refinancing already completed by speculative-rated firms in 2024, we view a payment shock as unlikely. Instead, the key risk, in our view, is policy-related (for example, across-the-board tariffs, with retaliation from other countries).

Private debt’s structural growth

One trend we expect to gain additional momentum in 2025 is the structural (and multi-faceted) growth behind the asset class of private debt. As we outline on the following slides, we expect private debt’s addressable market of borrowers and investors to expand in 2025 (and beyond).

The concept of directly negotiated, bilateral lending is not new and has existed well before the global financial crisis. But over the course of the post-financial crisis era, private debt has established its status as a sizeable, scalable, stand-alone asset class for a wide range of investors.

While the private debt industry has experienced significant growth over the past several years, it is still modest in the context of the broader alternatives universe (Exhibit 40). We see scope for investor participation in the asset class to grow. And for those already invested, we see room for target allocations to move higher.

Outside of the “alternatives” designation, we increasingly see private debt considered as a fixed income substitute in a “whole portfolio” approach. Investors are increasingly combining public and private fixed income exposures to optimize for liquidity, yield and diversification.

And markets are increasingly looking to private capital as a financing solution to fund durable growth.

Additionally, over the course of the past two years, the definition of what the term “private debt” encompasses has also broadened, to include financing that can be originated, structured and held by a lender. This is a much wider definition relative to the “traditional” reference to middle market corporate lending.

Placing the avenues of growth in context

Market forces, technology and regulation are consistently moving financial activity to where it can be done most efficiently, leading to structural growth in the private debt asset class. Data from Pitchbook LCD estimates the global private debt market – focused on the historical definition of directly negotiated lending to middle market corporate borrowers – totaled $2 trillion as of year-end 2023, inclusive of dry powder.

As we discussed earlier this year, this represents only a portion of what we believe is the true total addressable market for private debt, which also includes lending to IG-rated corporates, as well as private asset-based finance (ABF). For context, an April 2024 analysis by Oliver Wyman4 framed the U.S. specialty finance market at $5.5 trillion in size and estimated that private debt held only a 5% market share of that lending.

Even within the “narrow” definition of private debt, we still see scope for continued growth. This is driven by an expanding addressable market of investors in private debt, as well as broader utilization of private debt as a financing tool. Exhibit 41 frames how the insurance and wealth channels have evolved to be growing sources of capital for private debt lending. According to Pitchbook LCD, approximately $285 billion of private debt capital was raised by the seven largest public U.S. alternative asset managers in 2023. Of this amount, 52% was raised in the institutional channel, 40% was raised in the insurance channel, and 8% was raised in the wealth channel.

These market opportunities are substantial. For example, the U.S. insurance industry reported $8.5 trillion in total cash and invested assets at year-end 2023. And Federal Reserve data estimates U.S consumers’ aggregate financial assets (inclusive of deposits, investments, pensions, etc.) totaled $117 trillion as of 2Q2024.

Past commentary

• 4Q2024
• 3Q2024
• 2Q2024