(Bloomberg) -- Some of Wall Street’s top junk-bond strategists say 2025 is when the trend toward tighter spreads on high-yield US corporate bonds begins to turn.
Spreads will end next year “just a little bit wider” from their current level, Meghan Robson, managing director and head of US credit strategy at BNP Paribas, said on a panel at Bloomberg Intelligence’s 2025 credit outlook conference on Thursday.
High-yield spreads are hovering near post-global financial crisis lows but remain above the tightest levels ever.
“We generally think spreads are rich, but they’re not nosebleed rich,” said Matt Mish, head of credit strategy at UBS. UBS modeling shows that spreads should be in the “mid-300s,” he said during the panel.
Five-year Treasuries offer another hint that the market is overpriced, said Winnie Cisar, global head of strategy at CreditSights. Historically, spreads have been 1 percentage point wider than the current risk premium.
“Not to say 2025 is going to be a particularly dire year, but we think the spread environment is a little tight for where fundamentals are going to go,” Cisar said.
Possible causes for wider spreads could be the tariffs proposed by the incoming Trump administration, renewed inflation and subsequent pauses to rate cuts, according to the panel discussion.
“The market is pricing what is good about the new administration and fading what is negative,” Mish said. Unexpected monetary policy tightening could catch investors by surprise, driving a widening between 0.50 to 0.75 percentage point, he said.
Still, spreads have remained persistently tight in recent years, said Oleg Melentyev, head of high-yield credit strategy at Bank of America. The market will correct eventually, he said.
“We think that the longer, natural rate of spreads is not in the 200s,” he said.
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