Busy primary shows fixed income’s strong technical backdrop

It has been a busy start to 2025 in fixed income markets. After the Federal Reserve’s (Fed) hawkish December dot plot, which added fuel to a sell-off in rates last month, you might have thought primary market activity would be more cautious than both issuers and investors would have anticipated a month ago. After all, 10-year US Treasury yields have risen by nearly 50bp in that time, while 10-year Bunds and Gilts have done so by roughly 40bp.

As it happens, Tuesday was one of the busiest days in primary markets for some time. In European financials, there was issuance across the capital structure including three Additional Tier 1 (AT1) deals from Standard Chartered, BBVA and Allied Irish Bank, a couple of Tier 2 deals from BPCE and Assicurazioni Generali, and a few further senior and covered bond deals. Moving on to corporate bonds, we counted close to €1.5bn across three high yield deals including a Lufthansa hybrid bond. In investment grade, close to €7bn of new bonds found their way into investors’ portfolios. In most cases books were several times oversubscribed and new issue premiums were conspicuous by their absence.

In the US it was a similar picture. Corporate bond issuance totalled $18bn on Tuesday, taking the week-to-date number to $55bn. Leveraged loans were not far behind with close to $33bn of new issues so far this week. The US Treasury was also in the market with a $39bn auction that cleared at a yield of 4.68%, after strong ISM Services numbers had taken yields a few basis points higher in the morning.

Volumes printed in credit, along with vigorous book sizes, speak of a healthy market where issuers are not deterred by yields being somewhat higher than a few weeks ago, while investors do not seem particularly fearful of tight spreads or further rates sell-offs eating into their total returns too much going forward. Evidence suggests investors have plenty of cash to put to work given flows into fixed income only started picking up relatively recently after several dry quarters in that regard.

These developments, coupled with yields that are significantly above the average of recent years, are expected to be a recurrent theme this year. A strong technical picture with steady inflows into the asset class is likely to translate into robust demand for new issues and any widening in spreads being relatively contained (if any widening appears). Breakeven levels are attractive given how high yields are, and we think the “sell due to tight spreads” versus “buy due to high yields” argument is being won by the latter group.

These trends are also backed by reasonable macro data and projections. There has been much doom and gloom regarding growth in the Eurozone, for example, but the Bloomberg consensus, which surveys 40 forecasters ranging from rating agencies to investment banks, shows no contributor expects even a single quarter of negative growth this year (just two of the 40 have one quarter each at 0%). Among the remaining 38, every single contributor has a positive quarter-on-quarter growth forecast for the Eurozone across 2025.

While there are certainly risks to these views, we can’t see spreads widening much into this environment, and thus it is no surprise to us that both issuers and investors seem comfortable with prevailing yields and spreads in the primary market.