Plant now and harvest in the future: What gardening and bond managers have in common
America voted on Tuesday but US citizens still don’t know who will be their next president. Although Biden currently seems to have a higher chance of declaring victory, all indications are that in such case the Trump campaign might contest the election results in court. A protracted period of haggling over the election would represent a rather negative outcome for financial markets due to heightened uncertainty, but wonʼt affect all asset classes in the same manner. In fact, US corporates had already entered the recovery phase of the credit cycle before the elections and are well prepared to withstand volatility with corporate cash balances at all-time highs.
In addition, corporate credit markets continue to be supported by the U.S. Federal Reserve (Fed). Initially, the Fed launched the corporate bond buying program as a back-stop facility which allowed corporates to use the Fed as a lender of last resort. Now the Fed is actively buying US corporate bonds with up to four years maturity, including BB-rated bonds. This has alleviated market jitters incentivizing investors to pile into corporate bonds. In case market uncertainty continues due to a botched US election outcome, the Fed could easily restore confidence in the corporate credit market by stepping up its activities under the primary and secondary market credit facilities. Therefore, any spread widening should turn out to be modest and liquidity conditions should remain favorable.
While a period of increased volatility is looming, investors could seize this time by making use of mispricings and market inefficiencies. Aside from yield pick-up opportunities within bonds of the same issuer denominated in different currencies, increased central-bank activity in the US and European credit markets has caused spreads in some markets to behave differently than usual, creating buying opportunities for global investors. Any market weakness can turn into a buying opportunity, provided the credit fundamentals of issuers are subject to in-depth analysis.
While the US economy is still recovering, the US market is likely to continue offering decent yield pick-up compared to other markets in Europe or Asia. In addition, the cost for hedging currency exposure has been decreasing. This attracted overseas investors, including from Asia, into the US dollar market, in particular to IG-rated corporate bonds.