The combination of an economic expansion, an easing Federal Reserve, and expectations of expansionary fiscal policy have propelled corporate bond spreads to their tightest levels since the mid-1990s, as investors capitalize on the highest all-in yields available since the Global Financial Crisis (GFC).
Although valuations sit on the richer side of historical norms, there’s potential for spreads to tighten further. Historical data reveals that December and January are consistently favorable months, with spreads narrowing most times over the past 30 years. Since 1995, December spreads have tightened by an average of 5 basis points (bps), while January follows closely with an average tightening of 4 bps. Both months rank among the most favorable for credit spread performance, with April being the only standout exception.
The strength of December and January is supported by a high “hit rate” for spread tightening. Over the past 29 years, spreads narrowed 72% of the time in December, making it one of the most reliable months for tightening. January isn’t far behind, with a hit rate of 67% since 1995.
Corporate credit markets are poised to end the year on a strong note, bolstered by a confluence of an economic expansion, an accommodative Federal Reserve, the promise of expansionary fiscal policies, and favorable seasonal trends. This seasonal reliability, coupled with broader macroeconomic tailwinds, positions credit markets to maintain or even tighten spreads further as we transition into 2025.
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