Peter K Hajjar
Credit Research
Soft Landing or No Landing?
As we look ahead to 2025, credit markets are poised to remain resilient despite elevated interest rates and fiscal challenges. However, sectors like real estate, private credit, and sovereign debt may face increased pressure if conditions tighten further.
Over the past two years, global growth and financial conditions have shown resilience despite concerns surrounding inflation, central banks and elections. This resilience has continued to support credit markets globally. Looking ahead to 2025, our credit research team notes a general consensus among global economic forecasters that economic and financial conditions should remain favorable for credit markets, even if global growth moderates. Ironically, the conformity of this consensus is somewhat unsettling. We continue to view ourselves as credit risk managers for our Global Cash clients and are closely monitoring various risk factors that could impact credit markets and the investment universe for our Global Cash funds — which largely consists of issues from systemically important banks and financial institutions.
Like many market observers, we will be closely monitoring policy changes in the US brought about by the Trump administration. We expect that evolving immigration, trade, fiscal and regulatory policies will have global impacts, and could be inflationary — assuming Trump follows through on the intentions articulated during his campaign. However, the degree to which these policies contribute to inflation remains uncertain, given the potential variability in their scope and timing.
The announcement of changes is less important than the speed at which the changes are implemented, at least in terms of our 2025 outlook. Faster implementation could heighten “stagflationary” risks, particularly if a tit-for-tat trade war develops between the US and its trade partners, while draconian immigration curbs materially restrict the US labor supply. That said, this scenario is not our base case. There is a list of potentially mitigating factors that could impact the growth and inflation outlook in the opposite direction (i.e. disinflation and higher growth), such as a normalizing labor market and the potential for tax cut extensions and deregulation across various parts of the economy.
While credit markets largely withstood a significant global rate hike cycle in 2022–2023 (over 500 bps in the US!) without “breaking,” certain segments of the market still remain vulnerable to higher-for-longer interest rates — particularly commercial real estate, high-yield corporates, leveraged loans, and private credit. In the near term, we are more concerned about fiscal policy as a catalyst for fixed-income market volatility than we are about US tariff or immigration policy.
The public finances of most major global economies continue to deteriorate. In advanced economies, the debt-to-GDP ratio is on an upward trajectory in every country except Germany1. Global fixed-income markets have reacted to these trends by driving interest rates higher during certain periods in recent quarters, despite the expectation of rate cuts in the near-future.
Recently, market have been focused on France’s fiscal position, but several advanced economies have experienced bouts of volatility in their sovereign debt yields. These episodes are usually triggered when governments signal or imply a weakening commitment to long-term fiscal discipline or push for additional deficit-financed tax cuts or spending increases.
While politically popular, such actions prompt quick and severe reactions in bond markets. The Trump administration could trigger this type of reaction if it pursues further tax cuts financed by higher borrowing. Sharp rises in bond yields often lead to tightening of financial conditions, which carry significant macroeconomic consequences by raising the cost of debt capital across public and private credit markets.
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