Investment Review and Outlook

Tight Spreads, Solid Demand, and Tariff-Related Uncertainty Drive a Defensive Posture

During March and for much of the first quarter, the challenge for investors was factoring into decision- making economic data and policy implications that pointed to slower future economic growth and a potential for recession along with counterbalancing data and policy promises that suggested growth would continue, at least in the near term.⁵ Cross currents from sometimes conflicting economic readings and policy announcements buffeted the markets, often leaving investors uncertain of which way to turn. Bond market volatility was elevated, especially through March.⁶

Corporate spreads widened 14bps with most of the upward pressure coming towards the end of the quarter. Equity market volatility and tariff-related uncertainty weighted on investor sentiment. While more attractive than at the start of the year, valuations were still below the long-term median at the end of the first quarter. With tariff uncertainty morphing into the highest potential U.S. tariff rates in a century, the exogenous shock continued to push spreads wider in the first week after quarter-end.

Depending on where tariffs rates ultimately shake out, it is reasonable to expect volatility in the corporate market. Volatility should offer opportunities to selectively add to high-grade corporates at more attractive valuations. We believe credit picking is key, with the assumption that a slower-growth, inflationary environment may emerge, driving dispersion across sectors and issuers.

IG corporate new issuance surprised to the upside and registered a record first quarter with about $585 billion of bonds issued. As volatility picked up towards the end of the quarter, the IG market got quiet, as dealers and issuers waited to launch new bond deals.

The supply queue will likely be uncorked post-first quarter earnings and on days of relative stability in markets. At just over $100 billion in the quarter, taxable bond fund inflows remain an important source of demand for corporate bonds in addition to new purchases by insurance companies. While strong at about $356 billion in 2024, should net foreign buying of corporate bonds slow, other sources of demand would need to pick up the slack, which is a risk to the favorable technical backdrop.⁷

Credit fundamentals remain stable with solid earnings and margins, but tariffs complicate the profit outlook, particularly in Industrial sectors. Earnings are projected to grow by around 9 percent this year, per FactSet, but if tariffs stick, we see risks to the downside. If this were the case, credit implications would be negative for a broad subset of sectors.

Leverage is steady but deleveraging has stalled over the last two years and, if growth in operating cash flow was to slow or turn negative, leverage may creep up over the course of the year, potentially impacting credit ratings over time. Mergers were 20 percent higher in the first quarter but we expect mergers and acquisitions (M&A) to slow, given trade and tariff uncertainty. Deregulation, expected to be a tailwind for certain sectors, may also slow given staffing cuts at regulatory agencies.

The Breckinridge Investment Committee believes the Federal Reserve (Fed) will remain on hold through Q2 as it waits to assess the impact of tariffs and reprisals as they flow into economic data reports. Weaker economic growth, counterbalanced by higher core inflation, will likely prompt the Fed to cut rates once by the end of the year.

Valuations

Corporate spreads were 14bps wider in 1Q25 closing at an OAS of 94bps.

Equity market volatility and tariff-related uncertainty weighed on sentiment.

Still tight spreads in the 19th percentile argue for a defensive posture.

Despite uncertainty, all-in IG yields in the 70th percentile may support demand.

Technicals

IG supply was a record $585 billion in 1Q25, up 2 percent year-over-year (Y/Y). 

Taxable bond flows remained solid at $102 billion in 1Q25, but down 24 percent Y/Y. 

Modest new issue concessions and healthy order books indicated solid demand. 

Foreign inflows into U.S. corporates were strong in 2024 but have slowed recently. The outlook is uncertain.

Fundamentals

Credit fundamentals remain stable with solid earnings and margins. 

Agency corporate credit rating upgrades of U.S. IG bonds exceeded downgrades by about 3:1 in 1Q25.

Should reciprocal tariffs stick, credit implications would be negative for a broad subset of sectors. 

Earnings are projected to grow by approximately 9 percent in 2025, but if tariffs stick, risks to the downside are likely to emerge.

On the regulatory front, a trend to deregulation may reduce compliance and legal costs, but staffing cuts may slow progress.

Leverage is steady but elevated and risk compensation or spread-per-turn of leverage is below the long-term median.

[1] The Bloomberg U.S. Corporate IG Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. You cannot invest directly in an index.

[2] The Bloomberg U.S. Corporate IG Bond Index, Breckinridge, 3/31/25.

[3] Yield to worst (YTW) is the lowest potential yield an investor can receive on a bond, assuming the bond is held until its earliest possible call date or maturity date, whichever comes first, without the issuer defaulting. It essentially provides a worst-case scenario for the investor's return, considering provisions like callability in the bond contract.

[4] Barclays Research, U.S. Investment Grade Credit Metrics, Q4 2024 Update, 3/19/25 and Bloomberg U.S. Corporate Bond Index, 3/31/25.

[5] Breckinridge Capital Advisors, Inc., March 2025 Market Commentary, 4/11/25.

[6] Breckinridge Capital Advisors, Inc., March 2025 Market Commentary, 4/11/25.

[7] Financial Accounts of the United States, Flow of Funds Report, Federal Reserve System, Fourth Quarter, 2024.

BCAI-04092025-fdy8862l (4/15/25)

DISCLAIMERS: 

All information and opinions are current as of the dates indicated and are subject to change. Breckinridge believes the data provided by unaffiliated third parties to be reliable but investors should conduct their own independent verification prior to use. Some economic and market conditions contained herein have been obtained from published sources and/or prepared by third parties, and in certain cases have not been updated through the date hereof.

There is no assurance that any estimate, target, projection or forward-looking statement (collectively, “estimates”) included in this material will be accurate or prove to be profitable; actual results may differ substantially. Breckinridge estimates are based on Breckinridge’s research, analysis and assumptions. Other events that were not considered in formulating such projections could occur and may significantly affect the outcome, returns or performance.

Not all securities or issuers mentioned represent holdings in client portfolios. Some securities have been provided for illustrative purposes only and should not be construed as investment recommendations. Any illustrative engagement or sustainability analysis examples are intended to demonstrate Breckinridge’s research and investment process.

Yields and other characteristics are metrics that can help investors in valuing a security, portfolio or composite. Yields do not represent performance results but they are one of several components that contribute to the return of a security, portfolio or composite. Yields and other characteristics are presented gross of advisory fees.

All investments involve risk, including loss of principal. No investment or risk management strategy, including diversification, can guarantee positive results or risk elimination in any market.

Past performance is not indicative of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.

 Actual client advisory fees may differ from the advisory fee used to calculate net performance results. Client returns will be reduced by the advisory fees and any other expenses incurred in the management of their accounts. For example, an advisory fee of 1 percent compounded over a 10-year period would reduce a 10 percent return to a 9 percent annual return. Additional information on fees can be found in Breckinridge’s Form ADV Part 2A.

Index results are shown for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.

There is no guarantee that the strategies or approaches discussed will achieve their objectives, lower volatility or be profitable. All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. No investment or risk management strategy can guarantee positive results or risk elimination in any market.

Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa.

Equity investments are volatile and can decline significantly in response to investor reception of the issuer, market, economic, industry, political, regulatory or other conditions.

When integrating sustainability analysis with traditional financial analysis, Breckinridge’s investment team will consider material sustainability factors but may conclude that other attributes outweigh the sustainability considerations when making investment decisions.

There is no guarantee that integrating sustainability analyses will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize these analyses when selecting investments. The consideration of sustainability factors may limit investment opportunities available to a portfolio. In addition, data for sustainable factors often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.

Breckinridge’s sustainability analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed frameworks. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.

Investments in thematic customizations will subject the portfolio to proportionately higher risk exposure of any sectors or regions in which the investments target. In addition, the investments held in thematic customizations may not meet the desired positive impact or become subject to negative publicity; these types of events may cause the customizations to have poor performance due to the concentration of assets. There is no assurance that the customizations or the strategies will meet their objectives.

BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg does not approve or endorse this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.