Bond Voyage

Read this article to understand:

• What is driving the boom in hybrid issuance
• The pros and cons of European versus US investment-grade credit
• Mexico and Colombia’s fiscal balancing acts ahead of their 2026 elections

In this month’s Bond Voyage, we discuss what is behind the boom in hybrid issuance. We also look at the similarities and differences between the first and second Trump administrations, and what they might mean for European and US investment grade (IG). And in emerging markets (EM), the team reflects on their recent trips to Mexico and Colombia. As tariff announcements evolve, the watchword is caution. We hope our reflections help you make some sense of the potential risks and opportunities.

Feedback is important to us, so please send any thoughts on what you like, don’t like and suggestions on what we might cover in future blogs to: gcs.creditinvestmentspecialists@avivainvestors.com.

Hybrid boom: US issuers ignite global growth

Changes in rating methodologies are fuelling a boom in hybrid issuance as companies take advantage of favourable tax and ratings treatment. The Global Hybrid index has grown significantly, with 11 US hybrids added to ICE hybrid indices in January alone – and a total of 56 globally (see Figure 1).

What Are corporate hybrids?

Corporate hybrids are a type of financing that combines elements of both debt and equity.

Debt-like features:

• Fixed interest payments: Like traditional debt, corporate hybrids pay regular interest to investors.
• Maturity date: They often have a long maturity date, typically around 30 years.

Equity-like features:

• Subordination: In the event of liquidation, hybrid holders are paid after other debt holders but before equity holders.
• Equity credit: This refers to the partial recognition of a financial instrument as equity by rating agencies, which helps improve the company's financial ratios and creditworthiness by showing less debt on the balance sheet.

Why the boom?

The surge is driven by Moody's rating methodology updates, which offer tax advantages (interest payments on hybrids are tax-deductible) and equity credit, making hybrids attractive to US corporations.

The standardisation of the structure, combined with diversification benefits and higher yields, has boosted investment demand. Recent changes in insurance regulations have also made it easier for insurers to use corporate hybrids.

Key themes for 2025

• Increased issuance: More US and European companies are expected to issue hybrids.
• Rising M&A activity: Mergers and acquisitions are on the rise, further driving hybrid issuance.
• Innovation in hybrid structures: Continued innovation in hybrid structures is anticipated, particularly in the US market, with growth in structures designed to comply with Standard & Poor's rating methodology.

Rates and investment-grade credit: Is European credit a tactical trade or a strategic investment?

All eyes and ears are once again on President Trump. This situation is reminiscent of late 2016 and early 2017 when markets tried to assess tariffs and geopolitical relations. Despite different starting points in 2016 and 2024, both periods fuelled an initial rally in the S&P 500 – in the period from November to February – and stoked fears of inflation from tariffs, pushing longer-term yields higher.

In 2016, uncertainty initially fuelled a sell-off in both regions before a credit-driven boost to US growth saw US IG spreads tighten. Meanwhile, European IG spreads continued to widen as markets grappled to assess the effects of tariffs on European companies. By the end of February 2017, US IG spreads had fallen below European ones for the first time since the eurozone debt crisis.

In contrast, the 2025 administration is using deregulation to generate a credit-driven boost to growth. The US president aims for lower energy prices and easier financial conditions, particularly at the long end (30-year) of the curve. Interest rates are far higher today, and the US Federal Reserve (Fed) has entered a cutting cycle, whereas it was just starting to hike in 2017. President Trump’s new agenda seems to have been partly priced in before the election.

One consistent trend is the higher long end of the US Treasury curve, with a steepening of ten basis points (bps) on the ten to 30-year yields. Key questions arise: Do markets believe in the credit-driven boost to growth? Are there real fears of tariff-led inflation? Or have markets realised tariffs are negative for US companies? US IG and US HY have been flat since the election.

In this context, is European credit a tactical trade or a strategic investment? A variety of considerations have been providing lively debate on the desks.

In favour of European IG, all-in yields are still at decade highs at 3.1 per cent. As the European Central Bank (ECB) continues to cut rates because of lacklustre growth, it looks to be a compelling place to invest. This is because further ECB rate cuts will likely see spreads widen, making European IG cheaper than US IG. There is also demand for European credit to satisfy pension fund needs, favouring domestic over global credit.

Yet these arguments are on a technical rather than fundamental level, pointing toward a tactical trade. Compared to the US, fundamental factors for growth generation appear unlikely. Defence spending is lower (though this may change), energy prices and the cost of regulation are high, and tariffs are a threat. Europe also suffers from a lack of innovation, competition from China and could see more strikes and public unrest.

In comparison, US IG spreads are historically tight at around 84bps and, although rates are high, they are looking less likely to move lower. Therefore, at 5.1 per cent, the all-in yield available on US IG is higher than on European IG and may seem like a better investment. But interest rates could create a headache over the course of the year, especially if growth and inflation pick up. As a relative value call, we think investing in European credit still looks compelling, even if it is from a rates perspective.

What if the Fed does cut rates and delivers more quantitative easing? It is a risk that builds the case for investment in US IG.

The buzz word this month is tariffs. They may be a negotiation tool but will bring inflation. The question is whether President Trump wants a full blowout or just small and targeted country-level charges.

The desk debates continue…

Emerging market debt: Pathways and pitstops

This month, the emerging market debt (EMD) team spent a week in Mexico and Colombia – two very timely country visits given the uncertainty generated by President Trump’s first few weeks in power. We had a chance to meet with policymakers, local market players, think tanks, and political analysts.

On the trip, we realised it wasn’t just spending a week at an average altitude of 2,500m that was giving us shortness of breath and headaches. But also that, as we feared, both countries are facing very challenging fiscal dynamics at a time when real rates remain high amid strong external headwinds. Meanwhile, with both countries holding elections in 2026, course-correcting fiscal trajectories this year becomes all the more difficult.

Mexico – Running in Place

It felt like springtime under the sunny skies of Mexico City. But despite the hustle and bustle of the city, the economy is losing momentum, and the uncertainty generated by President Trump’s tariff policies hangs like a dark cloud over the country’s outlook.

There are reasons to be upbeat: the team assembled by President Sheinbaum four months into her presidency is widely seen as pragmatic and professional, and engaged with stakeholders in a way that former President Lopez-Obrador’s administration wasn’t. The growth slowdown is policymakers’ overarching concern, resulting in better coordination of monetary and fiscal policies. Externally, there is also a sense that President Sheinbaum’s cool-headedness in dealing with the tariff threats north of the border did well in defusing tensions and putting the country in good stead with President Trump.

But not all that glitters is gold. Externally, the biggest risk is that the US president could remain unclear over future tariff policy. That would keep uncertainty levels elevated, preventing a much-needed boost to investment and sentiment. In short, there is no guarantee President Trump views his tariffs against Mexico solely as tools for negotiation or leverage. It is therefore difficult to discount this risk, even as the Mexican side appeals to the merits of strengthened “regionalism”.

Despite the geopolitical noise, however, Mexico’s real challenges remain domestic in nature – mostly in terms of fiscal dynamics, and especially with regards to PEMEX (the state-owned petroleum corporation run by the government). In meeting after meeting, we found Mexico’s fiscal stance to be the main downer of the trip. The coming years will see a structural rise in spending on things like pensions and social transfers. Yet, knowing full well Mexico’s public finances are on a deteriorating trajectory, the government doesn’t seem willing to consider revenue-raising measures.

Meanwhile, PEMEX continues to drain the budget by an estimated 1.5 to two per cent of GDP per year, making fiscal trade-offs increasingly difficult as production continues to collapse and oil prices risk falling further. Our concern is that, in the absence of a wholesale strategy, the market will increasingly push for a solution, putting pressure on Mexico’s already limited fiscal space.

That said, we did return feeling that 2025 may be a transition year, with some policy space available to the authorities. However, cognisant that 2026 will likely be a crunch year for the budget, we will be closely watching whether President Sheinbaum can carve out the needed political space this year to set in motion a series of measures that can course correct and capitalise on Mexico’s myriad opportunities.

Colombia – the “Lula” factor

Bogotá’s cloudy skies reminded us of London and were a better reflection of the mood on the ground, despite the city’s vibrant energy and colours. Locally, attention has already turned to the 2026 elections, where a “light at the end of the tunnel” trade is starting to form on expectations that the centre-right political forces will come back to power.

However, we found more challenging fiscal dynamics than anticipated, given the government’s new financing plan rests largely on overoptimistic revenue assumptions. While asset prices have reflected some of the deteriorating fiscal trajectory in Colombia, a key question is whether enough is in the price or not. We think not yet, as markets may be expecting much less fiscal slippage in 2025 than might ultimately occur given the scope of the potential shortfall this year.

Meanwhile, an excessive minimum wage hike and a lack of anchored fiscal policy have created upside risks to inflation. Although real rates are very high, the country’s central bank, Banco de la República (BanRep) may be forced to pause rate cuts as these risks begin to materialise. 

The comparisons with the fiscal deterioration in Brazil under President Lula, who is also facing an election in 2026, seem obvious at first sight. But comparing the two may be a stretch; after all, Colombia enjoys much more robust institutions, and despite all the rhetoric, President Petro’s bark has proved louder than his bite.

That said, ensuring the fiscal deficit doesn’t widen relative to last year will require spending cuts that may be difficult to implement in a pre-election year.

And so, as with Mexico, this year will largely be about watching the interplay between political choices and fiscal outcomes. The market will be looking for more robust signs of the latter, with some cautious optimism over the former.