Barclays: Expect US to enter rare non-recessionary easing cycle to support credit market performance next year

Steven Oh, global head of credit and fixed income at Barclays, and co-head of leveraged finance, said the US was entering an unusual non-recessionary easing cycle, which would support credit market performance next year, particularly leveraged finance assets. Republican control would further support risk assets from a fundamental perspective, but could create headwinds for regions outside the US. He said stimulus fiscal policy would add to short-term inflationary pressures, forcing the Fed to reduce its easing and keep the yield curve at recent highs, which he expects to continue next year. Given the weaker economic outlook in Europe, the ECB would steadily cut rates, and the dollar could strengthen further. He said a balanced approach to portfolio risk positioning was warranted, with continued focus on selected securities. He noted that the default rate for high-yield bonds had peaked in this cycle and was expected to decline, while the default rate for leveraged loans (including distressed debt operations) was expected to remain near historical averages. Strong demand for collateralised loan obligations (CLOs) supported loan demand and the market's technicals, given the higher total yields. In investment-grade credit and rates, any short-term weakness was expected to create buying opportunities. China, emerging markets (particularly Mexico) and even Europe could face trade policy challenges, but the resulting sell-off could create buying opportunities for credit assets in neighbouring regions, such as broader Asia investment-grade or high-yield bonds, and broader emerging market investment-grade bonds relative to developed markets.