Capital Group US Corporate Bond Portfolio Manager David Lee Shares His Outlook for the Market

Could you provide us with a brief review of the market in 2016?

There were three defining events that had significant impacts on the US corporate bond market in 2016: a fear of economic slowdown in China; the UK’s vote to leave the European Union; and US President Donald Trump’s election. While the first of these events caused spread widening in the US credit markets, the other two unexpectedly led to a tightening of Spreads.

This was predominantly due to a backdrop of positive US economic growth and accommodative monetary policy globally generating demand for Higher yielding securities during a period of uncertainty. However, Trump’s election and the US Federal Reserve’s (Fed) subsequent Decision to raise short-term interest rates also drove US corporate bond yields higher.

This led to a loss of total return. US corporate leverage continues to be high, with many companies releveraging to pre-financial crisis levels. Combining this with decelerating profit growth suggests we may be in the later stages of the credit cycle. Meanwhile, bond issuance has continued to be high. At the same time, merger and acquisition (M&A) activity – while slower than the record levels reached in 2015 – remained very high in 2016. Low interest rates have increased the appeal of using debt to finance M&As, and as such the supply of debt also remains high.