Kay McCarthy, Head of Jersey Office at The International Stock Exchange (TISE), reflects on 2024 and discusses the outlook for capital markets in 2025.

By mid-2024, inflation across developed economies had finally started to cool down, bringing some stability back to markets. Central banks reached an inflection point in their interest rate policies, signalling an end to two years of aggressive rate hikes. 

Interest rates

In September, with interest rates at the highest level in a generation, the US Central Bank announced a larger than expected 50 basis point cut. This was the first since Covid swept across the globe in 2020. In the past, a move this aggressive would have typically been in response to a major economic or financial crisis, but today’s backdrop is relatively benign. The US jobs market is healthy, consumers are still spending, growth overall is solid, and inflation has dropped dramatically from its 2022 peak.

With inflation cooling and activity relatively muted, other western central banks also deemed it appropriate to cut rates. The European Central Bank delivered its second rate cut in September, taking interest rates to 3.5%, while the Bank of England embarked on its own easing cycle with a 25 basis point cut at its August meeting, the first in more than four years.

Capital markets

In the debt capital markets, despite historically high interest rates and elevated geopolitical risks bond issuance has been strong. By the third quarter, companies in the US had issued more than $US1.4 trillion of investment grade bonds, putting them on track for the second busiest year ever. This momentum is expected to continue given the need to refinance more than a trillion dollars of maturing debt and an increase in financing amid solid economic and corporate growth.

The high yield bond markets in the US and Europe also sprang back to life, with issuance showing strong gains after a slow 2023. The move toward interest rate cuts has pushed up bond yields, with high yield bonds outperforming both corporate and government bonds. With interest rates coming down in developed markets, there is significant demand for yields that are close to historical highs.

"In the debt capital markets, despite historically high interest rates and elevated geopolitical risks bond issuance has been strong."

European structured finance volume grew 12% through the third quarter, largely attributable to robust increases in securitisation markets. According to S&P, investor-placed securitisation was up across all major sectors while collateralised debt obligations, asset backed securities and residential mortgage backed securities had the highest volume.

The volume of refinancing deals was particularly high as many corporates refinanced existing debt rather than pursuing new issuances, particularly in sectors like real estate, retail, and construction, which were more sensitive to higher interest rates. 

This activity is expected to improve further next year as interest rates decline and lower borrowing costs encourage more corporate issuance, particularly in sectors that had been holding back due to high financing costs. 

M&A activity 

Mergers and acquisitions (M&A) in a range of industries has also contributed to the supply of bonds and lower rates next year should encourage more M&A and other growth-orientated demands for debt. M&A activity has been relatively stable since mid-2023 but still below the pre-pandemic pace. A majority of leveraged buyouts have been funded via equity this year and last. With inflation cooling and nominal rates expected to fall, real interest rates will likely decline, potentially stimulating further debt funded activity.

"A high proportion of the Exchange’s business flows are correlated to market sentiment, and with that we have seen a strong year for listing activity."

A high proportion of the Exchange’s business flows are correlated to market sentiment, and with that we have seen a strong year for listing activity. There has been a notable pick up in private equity backed transactions, across key asset classes including sustainability, infrastructure, technology and real estate. High yield bonds, both new issuance and refinancing deals, have also increased significantly as has securitisations and infrastructure debt financing. 

With increased confidence and renewed appetite for progressing investments, market sentiment has turned a corner, and this momentum will only get stronger in 2025.

This article was originally published in Business Brief, December 2024.