CREDIT
RISK MONITOR

A tight finish

Credit markets head into the final quarter of the year with credit spreads tight relative to history. This reflects market confidence in a soft landing. While there has been some upward move in yields around the US election, focused principally on the sustainability of debt levels, this has been at the sovereign level and less a reflection of concerns around corporate credit. The change in the ‘access to capital’ signal to green is a function of the global easing cycle having improved markedly last quarter. A backdrop of modest growth, subdued inflation and a resilient labour market has the potential to support credit markets into the year end.

Jim Cielinski Capabilities Quote Headshot
Jim Cielinski, CFA

Global Head of Fixed Income

Key Takeaways

  • Political risk to the fore. A tight US election race is adding to uncertainty. Meaningful changes to policy require control of both houses, outside of executive orders on tariffs. Additional tariffs have the potential to dampen growth by affecting consumption and investment while nudging up inflation.
  • Too much of a good thing? Regardless of who is in power, fiscal deficits are set to remain high. The corollary of this is that corporate profits should be supported by government spending, helping defaults stay relatively low. This requires inflation to stay under control.
  • Earnings remain supportive, if temporarily slowing. Earnings growth is likely to slow as companies report their Q3 earnings, given more challenging comparisons with a year ago. Even so, earnings growth is expected to remain positive and should continue to allow most companies to service debt repayments.
  • Capital markets receptive to issuers. The decline in policy rates means investors are looking to capture yield. Borrowers are typically finding issuance is met with strong investor appetite, evidenced by positive momentum in industry fund flows and tight new issue premiums.

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