2025 – The only way is down? Macro risks trump technicals in CACIB investor survey
A Crédit Agricole CIB survey of 118 investors found little conviction over what 2025 holds, from the direction of US monetary policy to the outlook for covered bonds. And with valuations across senior and subordinated bank debt rich, a bearish bias emerged — even if pockets of value are seen and solid technicals could mitigate any widening pressures. Neil Day reports, with insights from Crédit Agricole CIB.
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The technical factors that contributed to spreads rallying through 2024 to rich valuations are expected to persist in the coming year, but a Crédit Agricole CIB survey of 118 investors found a bearish bias for 2025, as the outlook for monetary policy become less obvious and potentially damaging.
Open from the beginning of November to the beginning of December, the survey attracted some 118 responses from investors. Sixty-nine were prominent asset managers, with the remainder spread across ALM desks, insurers, hedge funds, central banks and official institutions, corporates, pension funds, private banks and others.
On the overarching question whether they feel bullish or bearish about credit spreads in 2025, 60% of the investors are negative on the outlook, compared to 40% positive. The bearishness comes at the end of a great year for credit that has nevertheless left valuations at tight levels.
“There was a strong bullish consensus at the start of the year as to what credit would look like in 2024,” says André Bonnal, FIG syndicate at Crédit Agricole CIB, “but although there is a bias for 2025, it is the other way around and by no means a strong consensus.
“The bearishness probably comes from where spreads are in absolute terms and on a relative basis, not necessarily the overall tone of the market,” he adds. “A lot of people are actually going into the New Year knowing that technicals are very strong, but with spreads so compressed, they are a little bearish because it’s not clear to what extent the market can go tighter.”
Indeed, when asked which of four statements most appropriately describes the evolution of FI credit spreads in the first quarter (with multiple answers possible), 54% chose the option that technical supports are strong and current spreads could maintain the status quo for a while or tighten. And on a three month view, investors were also more likely to deem the spreads of AT1, Tier 2 and senior preferred attractive than unattractive.
Which of the following statements seems the most appropriate to describe the potential evolution of credit spreads in FIs throughout Q1 2025? (multiple answers possible)
Source: Crédit Agricole CIB
On top of tight spreads, Bonnal highlights that several risk factors coming into focus for 2025 may be contributing to the bearish bias.
Score each spread driver in terms of importance from 1 (very important) to 5 (least important) in the near future
Source: Crédit Agricole CIB
Uppermost among these in respondents’ minds are the European economic situation and US fiscal policy, with the latter proving marginally more of a concern. Interest rate volatility ranked third, and Vincent Hoarau, head of FIG syndicate at Crédit Agricole CIB, notes that the US economic situation overall will be key to developments in 2025, with reflation risk also a cloud on the horizon.
“In December 2023, the market was expecting six rate cuts in the US,” he says, “but when we look at monetary policy there in 2025, there is a lack of certainty. The market is pricing in two to three rate cuts by June, but no more than that, and the rate-cutting cycle scenario can be seriously questioned. We may end up with a simple recalibration of the monetary policy rather than a proper cycle of rate cuts.
“The big surprise of 2024 was that the US economy has not landed and we still don’t know if or when it will. And on top of that Trump is more inflation-friendly than anything else — don’t forget that last time around the market experienced weakness every time he tweeted something about tariffs.”
Although a potential reverse in the direction of rates could spell further trouble for commercial real estate, the sector has fallen sharply down investors’ agenda, ranking lowest among the possible spread drivers they were asked to score.
Divergent US, European paths
Visibility on the outlook for Europe is greater than for the US, but its contrasting economic situation is set to be a key factor in 2025 developments.
“The question now is to what extent the very big macroeconomic spread between Europe and the US will cause some market volatility with regards to the shapes of the rate curves, with potentially a sharp steepening of the US Treasury complex and euro swaps following in sympathy — hurting long-dated assets most,” says Hoarau. “For the time being, everyone wants to own US-denominated assets and US dollar inflows have been exceptional in November.
“There is stronger uncertainty with regards to the situation in Europe but we are not concerned for euro credit. The rate direction in Europe is very clear — we are likely going to have one rate cut at each and every central bank meeting in Europe for at least the first half of 2025.”
Some 64% of survey respondents expect 10 year euro mid-swaps to remain relatively stable in a 2%-2.5% range, with 28% expecting a lower rate — possibly suggesting a median above but close to 2%. Just 8% expect a rate above 2.5%.
When it comes to their tenor of choice for January, the belly of the curve appears the most popular among investors, with 56% choosing up to five years and 50% five to seven years (multiple answers were possible). Short dated FRNs were selected by 12%, seven to 10 years by 24%, and longer than 10 years by 9%.
“This makes sense,” says Bonnal, “especially if you consider that rates may be going up in the US, so you don’t necessarily want to load on too long duration, while in euros up to five, seven year part of the curve is pretty consistently favoured from one year to the next.”
For credit, what will be your tenor of choice in January 2025? (multiple answers possible)
Source: Crédit Agricole CIB
The evolving monetary policy situation in 2025 will stand in marked contrast to 2024, which saw investors benefiting from functioning forward guidance from central banks.
Hoarau suggests this helps explain a relatively muted and ambivalent impact from recent announcements on respondents’ behaviour towards bank debt.
“The recent meetings have been pretty much a non-event,” he says. “Since the start of the rate cuts on both sides of the Atlantic, the trajectory has been relatively straightforward.”
How is your investment behaviour being influenced by the recent central bank (Fed/ECB) meetings and rate announcements?
Source: Crédit Agricole CIB
Despite not ranking as the biggest concern for most investors, French and German politics was the topic fewest investors deemed to be of low importance. The Barnier administration in France fell in the midst of the survey — although later respondents scored core European politics lower in importance than those who completed it early, with Bonnal noting this tallied with the OAT-Bund spread tightening 6bp on the day of the government’s collapse, partly because so much bad news had been priced into French bonds.
“It’s a kind of, buy the rumour, sell the fact,” adds Hoarau. “I wouldn’t read too much into positive developments in the direction of OATs — going into year-end, more and more people have taken a neutral stance on this theme because nothing is certain. Meanwhile, the concept of shutdown doesn’t exist in France — the 2024 budget will be repeated and run until there is some kind of resolution.
“The only question is, when do investors start to get upset about the situation? We will see. In any case, given the recent underperformance of French risks, the jurisdiction looks fairly attractive, and even a downgrade of the sovereign seems to be priced in.”
Geopolitical tensions meanwhile appear to be a secondary concern for investors, even if they were reminded of the Middle East crisis, among others, with the overthrow of the Syrian government beginning while the survey was being conducted.
“It’s not the clear preoccupation of investors,” says Bonnal, “which gives you the impression that they have learned to live with geopolitical risk after it proved not to be an issue for the market in the past year or indeed past years in spite of everything we’ve seen. Keep calm and carry on, and all that.”
Balanced against the risks contributing to investors’ bearish bias are the factors that have helped bank debt reach the valuations at which they stand today and which by and large will persist into the new year.
“Technical supports are potentially less strong than they were in December 2023, but they are going to mitigate quite significantly how much we could potentially widen,” says Bonnal. “The liquidity situation that has driven the market is still in play.”
Intertwined with this liquidity factor is the carry available, which Hoarau notes will again prove supportive.
“We may have lost some ground in the euro market, but we gained in US dollars,” he says, “but either way, the carry is still there to be enjoyed and protect investors from the return of volatility. As long as you can get 3%-plus on an IG paper in Europe, the market will continue to be fairly supportive — particularly when you look at the equity market, where things look very toppish, particularly in Europe given it’s heading towards zero growth if not recession.
“As long as rates remain not too far from where they are today, investors are not going to demand much greater compensation on a spread basis. And this is going to be supportive for the liquidity situation, where there is still a lot of cash to be deployed from money market funds into credit funds.”
AT1, SP preferred
AT1 is the part of the capital structure most commonly viewed as the most attractive by investors on a three month view, with 17% giving it the highest possible score. Combining the highest two possible scores, among unsecured and subordinated products senior preferred achieved the highest score, of 39%, just 1% ahead of AT1 and Tier 2. Some 20% of respondents said they expect greater differentiation among names in AT1 and Tier 2 instruments.
Considering the next three months, score each of the FI sub-sectors from 1 to 5, where 1 = very attractive spreads and 5 = not attractive
Source: Crédit Agricole CIB
More investors considered senior non-preferred as unattractive than attractive when looking at the coming quarter, while in the question allowing them to choose statements reflecting their view, 31% expressed an expectation that spreads in outstanding SNP/HoldCo will underperform on the back of primary market supply and a return of volatility.
Covered bonds emerged as the bank product attracting the fewest investors. Reading between the lines, a lack of focus on the asset class among respondents may have contributed to this outcome, although the lack of enthusiasm chimes with the unclear outlook for the instrument, according to Bonnal.
“On covered bonds, there is no consensus whatsoever,” he says. “There are those who expect covered bond spreads to underperform, but others who are not expecting much supply — as issuers might turn to senior preferred instead — and if supply undershoots, that will be positive for spreads down the road.”
Which of the following statements seems the most appropriate to describe the potential evolution of covered bonds throughout H1 2025? (multiple answers possible)
Source: Crédit Agricole CIB
Hoarau flags how the widening of Bund-swap spreads has contributed to covered bonds pushing wider, resulting in a narrowing versus senior preferred — a factor in the potential shift of issuance from the former into the latter.
“The covered bond arena is in repricing mode,” he says. “It has started, but I’m not sure it has ended, particularly for high quality names. The EU will fund more, up to €90bn in H1. This is likely to continue to be negative for SSA valuations overall and consequently add pressure on covered bonds spreads, particularly at the long end.
“This is also adding complexity in the assessment of Bund-swap spread direction and fair value.”
Bund-swap spreads came mid-table in investors’ ranking of spread drivers for the coming year. Some 53% of respondents expect the 10 year Bund-swap spread to be negative at the end of 2025, versus 47% expecting a positive spread.
Head south via France
Southern Europe, and Iberia in particular, is the most attractive area for investors when it comes to senior and subordinated bank debt in 2025. More than half, 52%, of respondents gave Spain and Portugal the most favourable scores, with Italy also ranking highly.
“If you look at the economic situation in Europe,” says Bonnal, “Spain, Italy and Portugal are now the growth drivers, whereas core and semi-core are lagging. This also tells you that investors don’t have any problem with southern Europe converging even closer to semi-core and core.
“This is also somewhat reflected in covered bonds, for instance — although supply from Spain, at least, could underwhelm investors again in 2025.”
Credit & Sub Debt: considering the next three months, score the following regions from 1 to 5, where 1 = very attractive and 5 = not attractive
Source: Crédit Agricole CIB
However, Greece divided opinion after a particularly strong performance, with 36% of respondents ranking it as attractive and the same number deeming it less attractive, and a relatively low number sitting on the fence.
“Out of southern Europe, it’s one of the areas that people think has maybe come so far that it’s too tight now,” says Bonnal. “But there’s a bit of a mixed consensus, since you only have to look at Eurobank getting a book of some €3.5bn for their third senior trade this year — that tells you there’s enough people who still think there’s performance to be had.”
The US was meanwhile deemed attractive by 45% of respondents, proving much more interesting than other non-European jurisdictions — Japan received the second least votes for being attractive, only beating Canada.
“Australia and New Zealand were also seen as trading on the expensive side versus some other countries,” says Bonnal. “It seems that if we’re not talking Eurozone, the US is the country of choice versus APAC and Canada.”
Canada witnessed the sharpest contrast in its unsecured and secured profiles, ranking third in attractiveness among covered bond regions.
“Canadian covered spreads are still seen as offering value,” says Bonnal. “And if you think of where Canadian senior trades versus covered, they are very close, and we’re talking about a technically bail-in-able product that banks use for their TLAC ratios — although pari passu with deposits — rather than senior preferred.
“The lack of supply may also be a factor in making investors think it is still attractive.”
Covered Bonds: considering the next three months, score the following regions from 1 to 5, where 1 = very attractive and 5 = not attractive
Source: Crédit Agricole CIB
Opinions on Canada were nevertheless relatively divided — as they also were for France. The country ranked second in attractiveness in unsecured debt, and in covered bonds came top, with 40% of investors giving it favourable scores.
“Current levels are seen as a good entry point,” says Bonnal. “Among national champions, we have seen some French senior non-preferred trade wider than its Italian counterparts in the past weeks, for example.
“Investors took their chips off the table earlier, in July-September, but now, while they might not think everything’s fine, people are OK with the status quo and levels are deemed attractive.”