Credit factor performance 2024: Carry investors thrive as momentum and value trail
2024 was a good year for credit. Spreads fell and carry investors outperformed strongly. Momentum and value bonds, on the other hand, underperformed by historical standards. This trend is likely to reverse in 2025 as spreads are tight, explains Dr Harald Henke.
Dr. Harald Henke
Principal Investment Strategist Fixed Income
How did credit spreads develop in 2024?
2024 was another positive year for corporate bonds. While the economic development in the US was uncertain for a long time, it turned upwards in the second half of the year, providing credit investors with positive spread returns.
Figure 1: Credit spreads in 2024
As the chart shows, global corporate bonds spreads fell by 26 basis points from 1.15 % to 0.89 %. Spreads on euro-denominated corporate bonds fell by as much as 36 basis points from 1.38 % to 1.02 %. In 2024, euro investors were therefore able to earn more than 4.5 % on euro credit and more than 2 % on global credit in 2024.
How did systematic credit factors perform in 2024?
We consider the following factors:
- Carry: The carry factor invests in bonds with high returns in the expectation of earning this yield over the holding period.
- Momentum: The momentum factor favours bonds of a company whose shares have recently outperformed. This factor assumes that bonds react more slowly to company-specific information than the shares of the same company.
- Value: The value factor consists of a portfolio of undervalued bonds. If the market were to reprice these bonds, they would catch up to their fair value and outperform.
- Multi-factor: The multi-factor signal is a weighted combination of the three individual factors.
The chart below shows the performance figures of these factors in 2024.
Figure 2: Factor performance 2024
Panel A: Euro Credit
Panel B: Global Credit
In line with the market trend, carry was the strongest factor in 2024. A stylised carry portfolio, investing each month in the 20% of bonds with the highest carry on an equally weighted basis, excluding transaction costs, would have added 1.65% in euro credit and 2.1% in global credit in 2024. This is to be expected in a market with falling spreads, as the riskiest bonds with the highest yields usually outperform in such a market environment. Value and multi-factor portfolios achieved a moderate additional return of around half a per cent, while momentum failed to beat the market.
The historical average shows that only carry is above the average of the last five years, as shown in Figure 3. The chart shows factor performances of the last six years and the average for 2019-2023.
Figure 3: Historical credit factor performance
Panel A: Euro Credit
Panel B: Global Credit
As can be seen, 2024 was the third best year for carry since 2019, behind the rally years of 2019 and 2023. Carry achieved a return more than double the average of the previous five years. On the other hand, momentum and value as well as the combined multi-factor signal underperformed in 2024. Momentum had its worst result in Global Credit, while value underperformed in all strategies.
The poor performance of value in particular is surprising at first glance. After all, 2024 was similar to 2023, when value performed much better. The value factor tries to identify and exploit mispricings in the market. It is therefore reasonable to assume that its performance is correlated with the dispersion in the market. The more heterogeneous the performance in the market, the greater the performance potential of the value factor.
Figure 4 compares the monthly dispersion of the credit sector spread changes and the value performance using euro credit as an example. The line shows the average correlation between the two.
Figure 4: Sector dispersion and value performance
The chart shows a strong positive correlation between the monthly dispersion of spread changes across sectors and value performance. Over the last six years, the dispersion was lowest in 2024. The value performance was correspondingly weak. In comparison, the crisis years 2020 and 2022 saw the highest spread dispersion and thus also the strongest value performance.
Outlook 2025
2025 is likely to be a different credit year to 2023 and 2024. While spreads could tighten further from current levels, the potential is increasingly limited. Any deterioration in the currently very bright economic news flow could lead to increasing volatility and rising spread levels. In such an environment, carry is unlikely to be the strongest factor, replaced by value and the multi-factor signal. Typically, dispersion in the market increases when market trends reverse, which plays into the value factor. The next few months will determine the direction of the year.
