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Watch the impact of the upcoming slowdown in US economic growth on investor appetite!

Corporate debt levels hit unprecedented levels!

  • US nonfinancial-corporate debt ended 2017 at a record 45.4% of US nominal GDP.
  • Previous peaks were recorded following a recession in a context of depressed profits.
  • The leverage rise over the last years was broad based.

 

In stark contrast, default rate are subdued …

  • US HY default rate at an intra-cycle low.
  • End of the wave of defaults in the energy and metals & mining industries recorded in 2015-2016.
  • Moody’s expect the default rate to decline further to approximate 2% during early 2019.

 

Financial conditions is a major driver of low default rate

  • Financial conditions remain near the easiest levels of 2018.
  • Financial conditions have eased recently despite increased Fed Funds.

 

When will the Fed’s monetary stance be restrictive?

  • Many debates about the level at which rate hikes would hinder growth.
  • The Fed's latest longer-term neutral rate estimate is 2.9%.
  • Lael Brainard : “With fiscal stimulus in the pipeline and financial conditions supportive of growth, the shorter-run neutral interest rate is likely to move up somewhat further, and it may well surpass the longer-run equilibrium rate for some period”.
  • Financial conditions are closely linked to investor appetite. Investors are sensitive to the ability of the US economy to maintain (or slow down gradually) its growth trajectory.

 

The impact of the deceleration in US growth on investor appetite is the clue. We do not expect the change in financial conditions to be linear.

 

2018.09.27 - Graph 1
2018.09.27 - Graph 2
2018.09.27 - Graph 3
2018.09.27 - Graph 4
2018.09.27 - Graph 5
AINOUZ Valentine , CFA, Credit Strategy
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Watch the impact of the upcoming slowdown in US economic growth on investor appetite!
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