Investors may be underestimating a coming slowdown, Axonic’s Head of Research, Peter Cecchini, told Bloomberg Real Yield. High-yield spreads near 350 bps imply future defaults of roughly 3.5%, yet the trailing 12-month rate, once PIK restructurings are taken into account, is closer to 4.5%. In Cecchini’s view, that gap signals a market still priced for resilience even as headline risks grow.
Those risks are most visible in Washington, where fiscal tension moves to center stage. Annual interest costs have already crossed the $1 trillion line. Cecchini argues that real spending restraint can’t be postponed forever, and the bond market seems to agree: 10-year Treasury yields nudged higher after the latest budget package cleared the House, hinting at disappointment that belt-tightening was lighter than hoped.
Expect a period of short-term pain, long-term health. Cecchini likens the upcoming adjustment to a hard workout, uncomfortable now, but beneficial later, as tariffs, tighter regulations and the fiscal backdrop converge. He sees growth cooling in the second half of 2025 while the riskiest corners of the market still trade as if clear skies lie ahead.
That outlook helps explain why bank balance sheets matter. A summer revamp of the Supplementary Leverage Ratio could decide how easily banks absorb the steady flow of new Treasuries, crucial after deposit flight forced some institutions to pare holdings. A more flexible SLR would give banks room to support the long end of the curve, muting rate volatility as momentum slows.
Want to discuss how these macro forces might shape credit and rates? Reach out to the Axonic team for a deeper conversation about portfolio positioning.
To learn more about how we’re thinking about credit markets heading into 2025, and what it may mean for your portfolio, reach out to us.