What developments can we expect on the US Corporate bond market?
US IG and HY delivered excess returns vs Govts of 3.8% and 6.1% in 2017. The combination of a broad synchronised upswing in the world economy, highly accommodative monetary policies and very low volatility led to another year of very good performance.
In a context where spreads (and volatility) are closing in on cycle lows, what should we expect for 2018?
Several trends have characterised the US Corporate bond market in recent quarters:
How can we position in 2018?
We are in the late phase of the cycle. Looking ahead to 2018, we believe it will be difficult to deliver solid returns similar to 2017. The potential for further spread tightening is limited. We expect returns to be primarily driven by carry.
We remain upbeat on US IG as some positive surprises can be expected:
We have a more cautious stance on US HY for fundamental reasons:
What are the risks associated with this scenario?
1) A lower growth environment:
2) An increase in the global yield environment
We expect growth of 2.6% in the US in 2018 and a very gradual and contained rise in inflation. Liquidity injections by central banks are approaching their inflection point but will remain positive in 2018 despite the Fed’s reduced balance sheet. Macroeconomic and monetary policy conditions will continue to support credit markets in 2018. The main risk is an abrupt end to the current environment. A surprise upward inflation could be a trigger.
Demand from foreign investors
One-third of US HY companies
No maturity wall but structurally