In the attached publication we discuss our take on the US Investment Grade credit market through a "top down" lens, and provide bespoke data supporting our views.
- We see potential for a year-end tightening rally in spreads (to IG +115bp), driven by technical flows and supportive economic data. We point to lighter-than-expected forward supply, heavy YtD client selling volumes and the relative attractiveness of the IG asset class as supportive for cash levels, which will be put to work before the end of the year. We expect a moderation in growth, but from a robust 3Q pace, justifying spreads at these levels.
- The current US growth/inflation regime is quite similar to the one seen at FY21, when IG Index spreads traded between +80-100bp, or ~30-50bp tighter than current levels. Spreads trade wider today based on expectations of economic weakness ahead. We consider 1) the level from which economic “deterioration” will occur (strong-growth mode, moderate economic stability); 2) the credit quality of US IG today; and 3) a 2021 analogue as key factors supporting spreads at current levels, including the modelled FY24 slowdown.
- We are cognizant of the economic headwinds ahead, including the resumption of Federal student loan payments, the impact of recent labour disputes (UAW, Teamsters layoffs), the impact of higher rates on the real estate and banking sectors, as well as recent geopolitical developments and their implications for energy prices. We see these issues weighing on spreads in 1H24, in tandem with the usual supply levels expected at the start of the year. We see the IG Index +160bp in a shallow recession scenario (as early as 1H24).
- Generally, we see economic resilience in the US prevailing through to the end of the year and point to improving forward and coincident indicators. Consumer savings buffers remain partially intact, PMI’s are expansionary + improving MoM, GDPNow is showing 4.9% for 3Q, inflation is closer to target + expectations contained. In addition, labour data is signalling a slight moderation, but no immediate cracks.
- We see value in Utilities and Communications names on valuation and their defensive nature and are available to discuss our most attractive setups/swap ideas.
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