The US corporate bond market is facing a test, and short term investors are bracing themselves for turbulence.
Earnings growth among companies is expected to slow down in the coming months while some still think there could be more volatility and uncertainty than usual. This is because of tax changes and more interest rate increases by the Fed. There’s also an increasing amount of debt coming due amid rising rates.
These factors will affect businesses’ refinancing needs and opportunity costs with regard to their reinvestment options including mergers and acquisitions. In fact, spreads have been widening recently as yields increased with demand for higher returns from investors looking at shorter term securities that would mature sooner with lower risk.
In spite of all the concerns about possible bumps on the road, many people are optimistic that this will not deter companies from accessing capital markets. This is because of an improving business outlook which has been more resilient than some expected since the election of Donald Trump as president in November 2016. Many investors believe that economic growth suggests more opportunities for businesses to get access to funding. At the same time, many economists remain bullish about the idea that tax reform could push up earnings and revenues of S&P 500 companies by 11 percent.
People think there’s still more room for spreads to widen further if more worry sets in about political tensions or slowing global economy, both factors adding risk premiums on creditworthiness of US firms vis-à-vis their foreign counterparts. They also expect volatility to continue but this doesn’t necessarily mean uncertainty for people in the market. To many investors, this is nothing new and they like to take it in stride, all depending on the extent of damage that occurs due to unforeseen circumstances such as terrorism or war.
People who are part of negotiations say that they aren’t expecting any more turmoil than they usually see when there’s a change in administration in Washington. However, prices can be affected by an unstable political climate and increased trade tensions between China and the US among others putting business confidence under pressure.
Investors will continue watching out for positive signs from corporations about their willingness to boost capital spending and raise dividends which would boost share prices further down the road. Many believe companies could use cash piles for transformative deals that are seen to be more appealing amid possibilities of higher tax rates.
“It’s easy in these moments when you have an interesting business cycle to look at the negative aspects,” says Ajay Rajadhyaksha, head of Macro research at Barclays. “You can always find them.”
Rajadhyaksha adds: “Still, in the end I think it will be OK for this market.”
