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What should your position on the credit markets be in the wake of Trump?


The essential

2016 was a remarkable year for credit markets. Corporate bond yields were strongly positive relative to standard government issues: US HY (+16%), Euro HY (7.6%), US IG (4.7%), and Euro IG (2.4%). We believe that in 2017, the credit markets will enjoy a favourable economic environment.


Additionally, technical factors will still be highly favourable on the euro market, and should even improve on the dollar market. 2017 is likely to mark a turning point: We anticipate a slight de-leveraging of US corporate debt levels and a return to leveraging for European companies. Investors’ yield expectations for 2017 are much more limited: the current level of spreads is much tighter than what was available at the start of 2016. We also note that the US market is outperforming its European counterpart by far. Against this backdrop, we prefer segments that offer yield in the eurozone (HY, financials, BBB) and the IG segment within the dollar market.

CROSS ASSET (Download)

February 2017


Février 2017


The Article


AINOUZ Valentine , Deputy Head of Developed Market Strategy Research
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Corporate fundamentals are at the centre of the game

Over the last decade, easy financial conditions encouraged an increase in sovereign and corporate debt. Indeed, the leverage of American companies has reached record high levels and US corporate debt has been used for financial risk-taking to fund corporate payments to investors, as well as for mergers and acquisitions. At the opposite, the leverage of European companies has remained at low levels as European companies have remained more cautious over this cycle. In 2019, we have evolved in a new regime: the global economy has entered a synchronised slowdown and major central banks have returned to an easing stance. What are the risks for companies in this new context? We are following closely: The downgrade risk in the US Investment Grade universe. Net leverage for US issuers have resumed their upward trajectory in recent months. In 2020: (1) companies to make a trade-off between maintaining share buy backs and the stability or their debt (2) the downgrade risk to increase among firms facing increase pressure on profits. The default rate risk for low-quality high-yield bonds. Sluggish earning growth poses the biggest threat for companies to pay interest on their debt despite the low cost of financing. Indeed, at this stage of the cycle, we think that interest coverage is more closely related to earnings than to its interest expense: interest coverage could be quickly eroded by a hit to earnings. A selective approach is required in the low-rated Euro and US High Yield segments.

Valentine AINOUZ

Deputy Head of Developed Market Strategy Research