In recent years, US IG technical factors were characterized by:
- Strong supply.Companies took advantage of the low interest rate environment to raise debt to fund mergers and acquisitions and share buybacks.
- Strong demand.In a low yield environment,the US IG market has been treated as a rate product.The demand from foreign investors has been a huge support.
In the years to come:
- Companies won’t face “a wall of maturities”. Very positive point. Indeed, companies took advantage of exceptional financing conditions to extend the average maturity of their debt.
- Refinancing requirements will increase significantly. US companies will have to refinance the huge debt incurred in recent years. The Leverage of US companies is now at record levels.
The lack of yield has made the US IG asset class very attractive. An increase in the global yield environment could change the game. This risk will be limited in 2018:
1. We expect a very gradual and contained rise in inflation
2. The net flow of global QE will remain positive well into next year, in spite of the Fed’s balance sheet contraction.
On the other hand, the probability of materializing this risk increases in 2019.