Technicals to Drive Further Tightening in US Investment Grade Corporate Spread
Strong Technicals Reinforce Investment Grade Credit, Limiting Downside Risk and Overshadowing Some Weakening in Fundamentals
Strong technical factors are supporting investment grade (IG) credit, including expansive Federal Reserve (Fed) actions and fiscal stimulus, inflows into IG from investors following the Fed (including renewed demand from foreign investors), and expectations of new supply tailing off for the remainder of 2020. Although certain company fundamental ratios are deteriorating given reduced operating cash flows and increased levels of debt, the latter should be viewed as a positive for corporates as it has enabled them to add cash to their balance sheets. By doing so, companies place themselves in the best position to weather the sharp recession and heightened uncertainty from COVID-19. We expect credit spreads to grind tighter for the remainder of 2020 absent any dramatic new developments on the health, policy or geopolitical fronts.
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