The US-headquartered firm, which concentrates on fixed income assets of various kinds, sets out its positioning and those of specific clients in areas such as high-yield debt, and investment grade bonds from governments and corporates.

Bond market “carry” – the income investors receive from a bond’s coupon – is “king” in the present fixed income market. Demand for most forms of corporate credit, particularly the kind offering higher yields, should continue in 2025 from the likes of wealthy individuals, Muzinich & Co argues.

The New York-headquartered firm, which had $36.3 billion of client AuM as at the end of November 2024, said there is still enough yield on offer in bond markets to pull in new money. With government budget deficits widening and concerns building about fiscal discipline, high-grade corporate debt issuers are the new “safe haven,” the firm says in a 2025 outlook.

Short-term interest rates should continue to decline in the US, eurozone and UK this year; the eurozone should bring rates down to 2 per cent by June, but long-dated bond yields will not decline by the same extent, resulting in the eurozone yield curve steepening, Erick Muller, director, market and product strategy at Muzinich, has told journalists.

The firm does not expect a global recession this year. Bond market supply may be higher, in net terms, during 2025, but there will be sufficient demand to absorb it, Muller continued. Corporate credit spreads – the gap between corporate bonds and government debt – will oscillate in ranges. “We expect wealth money to focus on higher yield,” he said.

Asked why he mentioned wealth management as a source of demand for such debt in particular, Muller said that such investors are particularly focused on earning a yield. By contrast, institutional investors are more likely to allocate to investment-grade and government bonds. Muller told the briefing that the firm expects more market volatility this year.

The firm is one of many that are setting out their asset allocation and tactical views in the early weeks of 2025, trying to figure out the smartest approach now that a new US administration is in office and with geopolitics still a source of volatility. (Muzinich gave its briefing last week, before the sharp selloff to Big Tech stocks yesterday – such as Nvidia and Microsoft – in the aftermath of reports that China’s DeepSeek generative AI product was purportedly cheaper to develop than its US rivals.)

With credit spreads settling into ranges, investors need to focus more on specific themes in their fixed income portfolios, for example, given the variety of countries’ corporate and government bond markets, Europe offers more compelling valuations than the US, Ian Horn, portfolio manager, investment grade and crossover strategies, told the briefing. “We are looking to add European exposure to global portfolios,” Horn said.

Horn also believes that investors can earn a credit spread premium by holding “peripheral” European investment grade bonds versus those in “core” European countries. As well as a spread pickup, such allocations also give investors valuable diversification from the political difficulties in Germany, France and the UK at the moment, he said.

Jamie Cane, portfolio manager, high yield bonds, said spreads in this part of the market are still “relatively tight” but the level of carry investors can earn is still “quite attractive,” and default rates appeared to be relatively low. 

There has been stress on European automakers’ bonds – the sector is under pressure from electric vehicle imports from China and the more broadly sluggish eurozone economy. However, some of these challenges have been flagged as far back as the early summer of 2024. With bond supply constraints and the fact that there are more “rising stars” (high-yield issuers upgraded to investment grade) than “fallen angels” (investment-grade issuers downgraded to high yield) in the mix of issuers, the Muzinich base case on high-yield debt is “reluctantly constructive,” Cane said. 

The cost of hedging positions as a percentage of the yield carry that can be earned, is still relatively low. “This is a nice time to run high yield with downside protection,” Cane said, adding that investors can gain exposure to the asset class with protection through a long-short strategy.    

Horn, commenting on the pressures European carmakers face from China, said the problems are already priced into these issuers’ debt. “If you have an underweight [portfolio position], it is time to close it.”

Warren Hyland, portfolio manager, emerging markets and multi-asset credit, said the “fundamentals” in emerging market economies were stronger today than they’ve been in more than a decade; 2024 saw more credit upgrades than downgrades in any year since 2012. Default rates of 1.5 per cent are well below historical averages. 

A desire by US President Donald Trump for lower interest rates, and the pursuit of stronger economic growth, should be generally positive for emerging market debt investors, Hyland said. 

“For people who like [yield] carry, it is an opportunity to go into emerging markets,” he said.