The slowing debt cycle, tighter credit spreads and reduced central bank support had already enticed us to take a rather cautious and neutral view on the corporate bond universe. There has, however, been some additional deterioration in fundamentals in the US investment-grade credit segment as leverage levels remain relatively high (and are higher than Euro IG for the first time in 10 years). Furthermore, the credit quality of the US IG segment also continues to deteriorate. Finally, the effect of the US corporate tax reform is difficult to gauge at this stage as a result of lack of details and high execution risks. With valuations that are no longer attractive, and with roughly 4.7 trillion set to mature through 2022, we are cautious on the US IG asset class and aim to hold an underweight position in it. We have also added CDX indices to our global bond funds.
Euro IG credit, while relatively tight in terms of spreads, is exhibiting strong company results and improving ratings. Furthermore, it is important to note that the share of issuance by non-Eurozone companies in Euro IG is increasing (to roughly 40%), making it a less “domestically dominated” asset class, as foreign companies aim to take advantage of easy financing in the euro area. Furthermore, technicals continue to support the asset class, with a significant level of debt that needs to be refinanced over the next 3 years (roughly 1 trillion) and continued strength in demand.