The Big Idea
Lessons learned in corporate credit 2025
This material is a Marketing Communication and does not constitute Independent Investment Research.
Investment grade corporate bond spreads took a round trip in 2025 going from Liberation Day wides to the early fall tights. The index eventually landed net tighter by a few basis points to leave excess return positive at 1.09% and cap off a moderate year of 7.4% total returns. Over that run, the timing on individual credit calls and macro relative value plays was critical. A look back at some of those recommendations provides insight into how those strategies stand today and guidance for the future.
#1: Higher beta insurance brokers were a solid trade in 2025
While an overweight to the segment was a relative win in 2025, going forward the trade looks increasingly crowded, stretching valuations and suggesting more of a market weight allocation.
Insurance brokerage credits have remained a favored segment of the broader insurance sector given their relative stability to traditional property and casualty names. As traditional P&C underwriters had struggled in recent years to bear catastrophe costs, those market conditions have helped the profitability of global insurance brokers. Furthermore, ongoing interest rate volatility still creates investment portfolio risk that more directly impacts insurance underwriters. The biggest credit risk to the industry has been the prospect of debt-funded M&A growth.
Santander US Capital Markets recommendations:
The segment performed relatively well throughout the year, benefitting names with more sensitivity to market conditions (BRO and AJG vs AON or MMC) as investors sought to add more credit risk in a favored operating environment (Exhibit 1). The most disruptive credit event was when BRO launched a 6-part debt launch funding package for their $9.8 billion June acquisition of RSC/Accession. They priced just over $4 billion for deal financing with the rest coming from an equity raise ($4 billion) and cash on hand. The bonds performed well in the days following their debut and existing debt only experienced a little bit of pressure with the announcement. Management remains committed to investment grade ratings. The acquisition boosted leverage to about 3.5x from in the 2x to 2.5x range, and the company is committed to deleveraging over the next several years.
Exhibit 1: BRO (white) and AJG (blue) 30-year note spread performance
Source: Santander US Capital Markets LLC, Bloomberg/TRACE BVAL Bid indications
#2: Surplus notes gather momentum, and a few caveats
Surplus notes largely performed well throughout 2025 as trading volume and investor demand ebbed and flowed with Treasury moves and rate expectations. Going forward, there is cause for more caution in the segment until Mass Mutual’s SEC investigation into potential accounting issues is resolved.
Insurance company surplus notes offer a way for investors to target higher (often ‘AA’) ratings while potentially adding spread over comparable or lower-rated senior unsecured notes issued by public insurance companies. While the spread between surplus notes and senior, publicly issued benchmarks has compressed over the years, these structures still allow conservative investors to get exposure to higher-rated credits in the long-end of the curve, without conceding much spread (Exhibit 2). There was limited new issued this year (below) but there still seems opportunity for growth ahead, and surplus issuers often come in waves.
Santander US Capital Markets recommendations:
MASSMU is one of the prominent issuers in the space. Earlier this year, the SEC raised concerns about the insurer’s investment accounting practices. The investigation is ongoing, with the SEC issuing subpoenas regarding the company’s bookkeeping related to billions of dollars of loans held in its general investment account. The concern for surplus notes is if accounting irregularities do exist and, in a worst-case scenario, results in a delay of payment on MASSMU’s coupons. That would likely cause the segment to reassess risk in surplus notes, serving as a reminder to investors that despite high ratings overall, the securities qualify as hybrid capital. At a minimum, investors should exercise a little more caution around the sector, particularly given that liquidity on these securities can fluctuate highly with interest rates.
Exhibit 2: Surplus notes compared to senior unsecured life insurance paper
Source: Santander US Capital Markets LLC, Bloomberg/TRACE BVAL G-spread indications
#3: Mixed results in JDE Peets and Keurig Dr Pepper
The call on JDE Peet (JDEPNA: Baa3/BBB-/BBB*-) in May worked as a function of timing with spreads still wide following April tariff concerns. But the announcement of the debt-funded acquisition by Keurig Dr Pepper (KDP: Baa1*-/BBB*-/BBB-) and spin-off plans in August served as a major credit event that will influence valuation going forward that were not part of that stand-alone recommendation. Going forward there does appear to be some attractive compression available in JDEPNA relative to KDP paper (exhibit 3), but the fundamental risks of the eventual combined entities and spin-off plans are worrisome.
Santander US Capital Markets recommendation:
The all-cash merger carries a transaction value of approximately $22.7 billion with equity valuation of roughly $18.1 billion. Pro forma net leverage for the combined company is north of 5.0x, with plans to spin off the combined coffee operations into a separate entity. Management has indicated that is committed to IG ratings at both eventual issuers, while the agencies have indicated low-BBB outcomes. The acquisition is expected to close within the first half of the coming year, with the tax-free spin-off coming later. The prospective debt issuance on the horizon and eventual debt issuance at CoffeeCo bring too much technical supply to suggest anything other than a marketweight approach to the KDP complex.
Exhibit 3: JDEPNA ‘31s (white) and KDP ‘31s (green) 1-year spread performance
Source: Santander US Capital Markets LLC, Bloomberg/TRACE BVAL Bid indications
#4: Net supply matters
During two of the slower issuance months of 2025 (May-June), the investment grade index saw two consecutive months of net negative supply to par value. It appeared then that may be keeping spreads artificially tight. And while temporarily true as spreads reached their local tights in September at a spread of 72 bp over the Treasury curve, new issue rapidly increased setting three consecutive months of record gross volume in Sept – Nov contributing to wider spreads over that stretch (Exhibit 4) before settling lower in December.
Santander US Capital Markets recommendations:
The huge new issue calendar was a big story for 2025 as gross new issue volume of $1.659 trillion was the most in any year since 2022. There is a broad range of expectations for both gross and net new issue volume in 2026, running from as low as $1.4 trillion to as high as $2.2 trillion. Most are leaning toward another banner year with the tech sector expected to lead the way on further AI infrastructure buildout. With that in mind, trying to time seasonal or monthly lulls in net issuance seems a difficult strategy to pursue in the year ahead.
Exhibit 4: Index size by par value (white) and spread performance (blue)
Source: Santander US Capital Markets LLC, Bloomberg LP
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