AllianceBernstein has predicted accelerating growth in the private credit market in the year ahead, but noted that the drivers of this demand are shifting.

In a new analysis, the global asset manager said that demand for credit could rise in 2025 if cash-heavy investors come off the sidelines. However, the firm noted that while the private credit market is growing, the high yield market is shrinking.

“At the same time, a growing portion of high-yield demand is coming from investors with high-yield and investment-grade crossover mandates,” the analysis said.

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“In our view, these dynamics will likely strengthen credit demand and keep spreads range bound.”

AllianceBernstein added that the coming year presents myriad risks and policy uncertainty, which are best navigated through active management, appropriate yield-curve positioning and prudent security selection.

“Regardless, we believe falling rates, sound fundamentals and pent-up demand make a strong case for investing in global credit markets in 2025,” the firm added.

AllianceBernstein’s 2025 Credit Outlook said that the year will see new political regimes across the world, and the likelihood of “untested policy proposals.”

Against this potentially disruptive backdrop, the asset manager expects credit markets to benefit from high starting yields, sound fundamentals and pent-up demand.  

“Corporate fundamentals remain generally strong for both high-yield and investment-grade corporate bonds, but dispersion has widened across sectors and credit ratings,” AllianceBernstein said.

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“At the top of the credit spectrum, the highest-quality investment-grade corporates have seen credit deterioration in the form of weaker interest coverage ratios.

“By contrast, BBB-rated bonds boast EBITDA margins higher than those of securities rated A and above – a long-standing trend that we expect to continue in 2025.”

AllianceBernstein said that the most compelling opportunities are to be found in the BBBs and BB-rated bonds, which it described as “a sweet spot that could allow investors to pick up yield without a proportional sacrifice in credit quality”. However, the report warned that credit selection will be critical here in order to avoid the risk of defaults.

The analysis also found that valuations are “a mixed bag” heading into 2025, which puts the onus on thoughtful yield-curve positioning.     

Read more: AllianceBernstein: Private credit outlook “still sunny”