One important challenge for corporate bond investors in 2017 will likely be a continuing rise in idiosyncratic credit risks in investment grade markets. A significant contributor is a wave of M&A activity, which often benefits a company’s shareholders at the expense of its bondholders. In a low growth environment, management teams struggle to deliver shareholder growth organically and so M&A or shareholder buybacks become a natural solution. However, this usually leads to an uptick in leverage ratios, which is a risk for credit investors.
Issues surrounding corporate governance are another factor. Examples include last year’s Volkswagen scandal and this year’s controversy surrounding Deutsche Bank and the US Department of Justice.
That said, we do expect stable, positive economic growth across the US and Europe next year and this should create a supportive environment for credit. At the same time, some of the tailwinds that drove the asset class in 2016, notably the ECB’s corporate bond purchase programme, are likely to fade away, and we are mindful of that.
For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.
Lucy Speake – Insight, a BNY Mellon company