Credit Market Themes in 5 Charts

Q1 2025

April 2025

Irvin He

Manager, Client & Product Solutions

Liam O'Sullivan

Principal, Co-Head of Client & Product Solutions

Amid a quarter marked by notable shifts across asset classes, we have compiled five charts that we think highlight some of the key themes and opportunities we see in the current market environment. Please feel free to contact us if you would like to discuss these themes further or learn more about how we could help you meet your investment objectives.

1. U.S. Trade Policy Uncertainty Drives Sharp Drop in Consumer Confidence

The Trump administration’s policy decisions have significantly heightened uncertainty, especially around trade. This uncertainty has led to a drop in business investment and a collapse in consumer confidence in the U.S. and Canada. The risk-off sentiment has led to bond outperformance compared to equities, with the global investment grade bond index up 3.2% on the year, while the S&P 500 has fallen over 7%, officially entering correction territory.

Source: Bloomberg, policyuncertaintyindex.com. Index returns as of April 3, 2025. Uncertainty Index data as of February 28, 2025; Consumer Confidence Index data as of March 31, 2025. Global investment grade bond index = Bloomberg Barclays Global Aggregate Corporate Bond Index; US Consumer Confidence Index = University of Michigan US Consumer Sentiment Index; CA Consumer Confidence Index = Canada Bloomberg Nanos Canadian Confidence Index.

2. Continued Divergence in U.S.-Canada Rate Path Due to Deteriorating Economic Outlooks and Trade Risks

Investors have piled into government bonds (a “flight-to-quality”) in response to the ongoing uncertainty in the market. While both U.S. and Canadian yields have declined significantly in Q1 2025, the Canadian curve has shown more of a steepening bias.

The yield differential across the two regions continues to be larger than usual, given different economic outlooks and the asymmetry of what’s at stake when it comes to trade. Note that in the event of a “risk-off” scenario, we believe U.S. yields have more room to rally than Canadian yields, given the higher starting levels.

Source: Bloomberg. Data as of April 3, 2025.

3. Volume of M&A Activity Has Not Grown as Expected This Year

Despite expectations of a more favourable regulatory environment for mergers and acquisitions (“M&A”) activity, heightened uncertainty has led to sluggish M&A growth in the U.S. To date, in 2025, U.S. M&A announcements total approximately $290 billion, roughly the same as last year’s year-to-date volume.

This stands in stark contrast to the elevated 2025 M&A estimates made at the end of last year. M&A activity is, at the margin, a key driver of U.S. investment grade (IG) issuance. A lower-than-expected number of deals this year would mean less IG bond supply than previously anticipated.

Source: Goldman Sachs. Data as of February 28, 2025.

4. Signs of Dispersion Emerge as Sectors Respond Differently to Tariff Threats

So far this year, U.S. industries have experienced varying degrees of spread widening, marking a reversal from the steady tightening observed throughout 2024.

Dispersion is emerging as Trump’s policy measures take effect. Notably, credit spreads for industries most exposed to trade tariff risks – such as autos, retailers, materials, etc. – have experienced more pronounced widening. We are treading particularly cautiously in these tariff-sensitive segments of the market but monitoring fundamentals for opportunities where it makes sense to add exposure.

Source: BarclaysLive. Data as of March 31, 2025.

5. Credit Spreads Have Started to Decompress After a Long Period of Convergence

High yield spreads have shifted meaningfully over the past month, with BB-rated bond spreads widening by nearly 150bps, now sitting at ~300bps. This move is consistent with the broader theme of decompression across all ratings categories.

While the spread differential has risen, the yield premium offered by BB-rated U.S. issuers is not yet as wide as that seen in 2022. While we continue to favor defensive positioning, we may look to add BBs exposure selectively in certain mandates as valuations become more attractive.

Source: BarclaysLive, Bloomberg. Data as of April 4, 2025.

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