Year to date performances delivered by EUR and USD corporate bonds are quite positive relative to other asset classes: in the Eurozone the “game changer” was the ECB CSPP, in the US the main driver was the recovery of the energy and commodity-driven sector.
We believe that in 2017 the ECB will continue to play quite a role in sustaining the asset class, not only through direct purchases, but also indirectly, keeping the primary market active and supporting investment inflows into corporate debt. Our models show that the average spreads of IG non-financial bonds eligible for the CSPP became tight compared to their fair values. Financial issuers continue to offer attractive valuation On the other side of the Atlantic, the expected rebound in US growth triggered by Trump election is positive for US credit. The fundamental of US companies should remain stable and default rates trending down from the current “mini cycle” peaks, but at the same time the leverage cycle is clearly ahead of the European one and. We must be vigilant about the impact on corporate fundamentals of the rise in long rates, the appreciation of the dollar and rising protectionism risk. Technicals will probably be less supportive than in the Old Continent. Fair value regressions show that corporate bonds still offer value in both US IG and US HY camps. We remain cautious about the lower-rated segments of the US HY segment.