Investy.com – US corporate credit spreads are set to end the year slightly wider than their recently tight range as inflation and growth ease, UBS analysts show.
However, in a note to clients this week, analysts led by James Martin suggested that President Donald Trump’s plan to impose tariffs on friends and adversaries alike posed the biggest risk to this outlook for credit expansion.
In particular, harsh levies could lead to potentially “significant damage to corporate profits”, analysts warned. They estimated the company’s earnings could shrink more than 6% if Trump moves forward with his campaign promises to slap a 60% duty on Chinese imports and a 10% surcharge on the rest of the world.
Since taking office, Trump has stopped short of such draconian measures, although he has threatened Canada, Mexico, China and the European Union with a possible February 1 deadline before slapping tariffs on them.
If the tariffs take effect, companies will see severe margin compression, while the settlements could add renewed fuel to inflation and persuade the Federal Reserve to raise interest rates, analysts said.
The comments come after a sell-off in US Treasuries earlier this month pressured investment-grade bonds, which are priced at a spread premium over their risk-free peers.
Although the jump in Treasury yields, which move inversely to prices, has moderated in recent days on a cooler inflation reading than seen in December, corporate credit spreads are under pressure from heightened investor demand for debt.
Many companies subsequently rushed to secure financing quickly and avoid further increases in borrowing costs, Reuters reported, citing analysts. Bankers estimate that between $175 billion and $200 billion will be raised in new bond offerings this month, according to Information (LON 🙂 Global market data cited by Reuters.
“The past few weeks have shown the resilience of credit spreads as rates and equity head into potentially higher inflation and less Fed tapering this year,” the analysts wrote.
“If [the personal consumption expenditures price index, the Fed’s preferred inflation gauge] [[starts] To move back towards 3%, we would expect spreads to widen, but stable fundamentals and limited contagion from [commercial real estate] It should help to continue the growth of moderates. “
