In mid-June, tensions between Israel and Iran escalated significantly. On June 13, Israel launched strikes on Iran’s nuclear and military infrastructure, prompting a retaliatory response from Iran in the form of missile and drone attacks on Israeli territory. The conflict sparked global concern over a potential broader regional war, particularly due to its implications for global oil supply.

Oil prices surged as markets priced in risk premiums, especially with the Strait of Hormuz, a vital chokepoint for global oil shipments located in the north of Iran, being briefly threatened by the conflict. A ceasefire agreement was reached on June 24, which helped ease immediate tensions and brought some stability back to energy markets.

In the US, PCE is tracking ~2.9–3.0%, down from 3.5% last year, reflecting sticky but stable inflation pressures above the Fed’s 2% target. Services inflation (health care, shelter) remains persistent, with shelter inflation up 3.9% YoY. Tariffs on autos, pharma, and consumer goods pose modest upside risks. US GDP growth is projected at ~2.0% for 2025 (downgraded from 2.6%). While slowing, consumption remains a key driver with resilient services spending offset by weaker goods demand amid higher rates and softening labour momentum. Business investment is uneven, with AI-related capex providing targeted support while broader capex slows.

Technical factors such as elevated supply, lack of foreign absorption and lack of any QE/Fed backstop led to the term premium continuing to rise and this may not be fully compensating for inflation/fiscal uncertainty. The US deficit remains ~7–7.5% of GDP, with net Treasury issuance projected above $3.4T in 2025, sustaining a structural supply overhang. Elevated coupons, continued QT, and persistent issuance pressures maintain upward pressure on term premiums and long-end yields.

US EBITDA margins rose further to 32.0%, marking a four-year high, while 72% of investment grade issuers posted YoY EBITDA gains in Q1 2025. Aggregate revenues rose 2.9% YoY, a slight uptick vs Q4 2024. Q2 topline growth may slow modestly as revisions trend lower, while margin guidance remains resilient despite macro crosswinds. Limited near-term refinancing risk remains, with <7% of IG debt maturing in 2025 and 75% of the universe clear until 2026+.

The spread per unit of leverage remains low at ~30 bps, below the historical range (40–45 bps), indicating limited compensation for modest credit deterioration or macro weakening. This emphasises the need for disciplined allocation. Net IG supply is down ~20% YoY, driven by elevated maturities, robust coupon payments, and cautious refinancing at elevated yields. Issuer discipline and the upcoming net negative supply environment in H2 2025 provide technical tailwinds.

High yield revenue grew ~1.8% YoY in Q1/25, moderating from 2.6% in Q4 2024, while EBITDA rose ~2.9% excluding energy. Sectors tied to domestic services and non-cyclicals continue to outperform, while discretionary sectors soften. ~61% of issuers beat EBITDA expectations in Q1, reflecting softening breadth. Interest coverage declined to ~3.8x, the lowest since Q2/2021, reflecting higher funding costs and softer EBITDA growth. Recent refinancing activity has locked in 300–400 bps higher coupons, particularly in B/CCC names now refinancing at 8.0–11.0% coupons, pressuring coverage lower. The spread per unit of leverage has declined further to ~75 bps, consistent with late-cycle tightness, last seen in late 2021. HY ETFs recorded $9.8B in net inflows YTD (as of June 30), a slower pace than Q4 2024, but consistent with steady institutional and retail demand for yield. In flows remain focused on BB and higher-quality B credits, reflecting cautious positioning within HY allocations.