2025 US High-Yield Outlook: Animal Spirits Stir as Volume Ramps Higher

This story was originally published on PitchBook.

With the biggest uncertainty from this time last year (the timing for the Fed’s pivot to accommodation) in the rearview mirror, high-yield market participants are looking ahead to a boom time for issuance in 2025. They anticipate an easier regulatory regime under the incoming Trump administration, opening the field for a further ramp in debt-financed M&A plays. However, wild cards are everywhere, as the administration signals trade turbulence ahead.

“The number-one thing we’re thinking about are the tariffs,” Amanda Rebello, co-leader of DWS Group’s ETF business, tells PitchBook LCD, citing concerns that retaliatory tariffs will burden the economy. “There is a lot of commentary about trade wars right now in the run-up to the inauguration,” she says. As for areas to watch, “technology as a sector is top of mind.”

The BNP Paribas Credit 360 team highlighted similarities with the period following the 2016 election, noting that the market is at a comparable stage of the credit cycle, with “few signs of froth.” In their 2025 credit outlook report, they wrote: “Things may change in 2025 — they did in 2017 — but the starting point is a cycle that is far from tired and in the absence of shocks could have a long way to run.”

Supply: A Healthy Boost, Thanks to M&A

Rates were volatile in 2024, as the Fed’s higher-for-longer policy lasted longer than expected. Still, borrowing costs trended lower, abetted by a strong tightening trend in risk premiums. Full-year volume—above $280 billion, or more than the combined annual totals in 2023 ($176 billion) and 2022 ($102 billion)—marked a high since the unprecedented covid-era blockbuster outcomes.

While this year’s big refinancing wave pushed out aggregate maturities, most projections are calling for bigger volumes ahead. Strategists have offered estimates in a $290 billion-400 billion range for 2025, again primarily fueled by efforts to refinance existing bond and loan maturities. Barclays falls on the lower end, expecting 2025 issuance to be on par with the current year. More bullish is Morgan Stanley with its $400 billion estimate, boosted by a “better balance between refi and new money creation as acquisition activity ramps up.”

No different than years past, the high-yield market in 2024 ran on refinancing exercises, with this use of proceeds dominating the docket in each quarter, ultimately holding a 70% share of the annual total. While that proportion is anticipated to be similar in 2025, a rise in opportunistic strikes and deals funding aggressive fiscal policy should spur bigger overall volumes, according to Street estimates.

“Part of the increase is likely to come from an increase in M&A/LBO activity, which is already underway and should get even stronger on the other side of the election and after a few more Fed rate cuts,” said BofA Global Research.

“For 2025, we expect less refinancing and more ‘net’ new issuance across bonds and loans amid a pickup in the M&A cycle,” JPMorgan noted.

As for the ramp-up already underway, M&A/LBO-related high-yield issuance accounted for 29% of total volume in the fourth quarter, up 10 points from the year-ago period. For now, LBOs remain a minor contributor to the upswing, accounting for about 3% of this year’s issuance.

“I think the biggest catalyst for LBO issuance next year is the holding periods for PE companies,” says John Sherman, portfolio manager at Polen Capital. “There’s a backlog of companies PE holders want to sell, and they were waiting for election results. With equities moving higher, we can expect to see more LBO issuance.”

More borrowers opted to play offense this year, with dividend-recapitalization-focused deals representing 4.8% of total issuance, rising above all annual totals since 2012’s slightly higher 4.9%. This practice will extend into 2025, by Street accounts. Sherman agrees: “Money is anxious to get to work, and pent-up demand is fueling the dividend and PIK issuance. I do believe we’re getting to the frothy stage of the market. We’re not there yet, but catalysts are there to take hold.”

Estimates also point to more liquidity padding—issuance for general corporate purposes—on a year-to-year basis. Deals allocated broadly to GCP accounted for just 4% of this year’s total, or less than half the shares in 2022 and 2023, versus an all-time high of more than 17% in 2020. That share hasn’t been lower than 4% since 2005. “Along with lower rates, better fundamentals should drive borrowers to bring forward issuance for capex and business operations,” stated Morgan Stanley.

Spreads: Tighter … for Now

Spreads in 2024 trended steadily to historically tight levels, residing comfortably under the 300 bps threshold as of early December, even as inflation strained at the Fed’s loosened leash. Credit strategists are largely penciling in a further narrowing on the front end of 2025, then eventually wider levels on the back half, with estimates spanning a range of 200-400 bps for the full year.

Morgan Stanley described its view as “a tale of two halves” for US credit markets. The firm said new money supply will do little to lift spreads, as technicals remain healthy, aided by high all-in yields and a steeper Treasury curve, along with rate cuts supporting flows into the high-yield and loan markets. The picture may become less rosy in the second half of 2025, though, as the supply/demand story becomes more balanced. “We expect fading technical tailwinds and the increased downside risk to growth to drive a modest spread widening in 2H,” Morgan Stanley stated.

Abetted by the spread tightening, new-issue yields compressed to 7.80% for the year, down nearly a full point from 2023’s 8.74% average. The downward tilt into 2025 includes a 7.67% average in the fourth quarter, versus 8.90% in the year-ago quarter.

Returns: Further (Smaller) Gains on the Horizon

Following a double-digit loss in 2022, the asset class was poised to record its second straight year of gains. Total returns topped 9% as of mid-December, per the S&P US High Yield Corporate Bond Index. Performance is expected to continue in the black for the year ahead, though perhaps with less vigor. Estimates range from 5.5% on the low end to roughly 8.0% on the high side.

“We forecast high-yield total returns in 2025 to come in around 5.5%-6.5%, down from this year due to lower carry and some anticipated spread weakness in the second half,” Barclays said.

Ratings: B Bonds Run the Show

Dissecting returns across ratings segments, performance was lopsided. In 2024, CCC paper provided a healthy 19% yield to investors (as of Dec. 11), eclipsing gains of 7.30% for BB bonds and 8.38% for B notes. Yet, supply from the riskiest ratings class slumped to a carve-out of less than 4% this year, which is the second-lowest share since 2009. Instead, deals were primarily dished out via B (39%) and BB credits (34%).

Again, the action is likely to gravitate toward the B space, which Barclays views as the “sweet spot,” with expected 2025 returns in the “6%-7% context, compared with 5%-6% for both BBs and CCCs.” For its part, Morgan Stanley advises caution on CCC bonds, citing “the sharp compression and persistent fundamental challenges for levered capital structures through a shallow cutting cycle.”

Sectors: Trump Trades

Oil and gas credits stacked the calendar this year, holding a 15% share of cleared supply. A shift away from the sector could materialize, however, depending on the incoming presidential administration’s policies. Additionally, in its global credit outlook, S&P Global Ratings flagged that “sticking points of US-China relations will continue to be trade, technology, and security,” potentially leading to reinforced “trade fragmentation and the relocation of supply chains.”

Rebello says, “We need to keep an eye on energy-related names. It could go both ways. The Trump administration may support traditional energy, but with the collaboration with [Elon] Musk, we could see a different outcome.” She thinks sector preference is leaning toward technology “on a nuanced basis” and “more stable names in defensive sectors like pharmaceuticals,” noting that “With the aging population and obesity-related issues globally, several companies continue to see increasing revenues.”

Sherman explains: “We continue to see technology, healthcare, services, and insurance brokerages as very attractive.”