Rising fiscal deficits drive billions into credit
If the moves persist, money managers could be shifting what for decades has been market orthodoxy: that nothing is safer than buying US government debt. But as US fiscal deficits climb, hurt by tax cuts and rising interest costs, the government may look to borrow more, and company debt may be the safer option.
In June, money managers pulled US$3.9 billion from Treasuries, while adding US$10 billion to European and US investment-grade corporate debt, according to EPFR Global data. In July, investors have added another US$13 billion to US high-grade corporates, the largest net client purchasing in data going back to 2015, according to a separate note from strategists at Barclays on Friday (Jul 25).
Michaël Nizard, a portfolio manager at Edmond de Rothschild Asset Management, started making the switch from government into corporate debt at the end of last year and is holding on to the position.
And in a note in the latest week, BlackRock strategists wrote, 'Credit has become a clear choice for quality.'
To the extent this shift is happening, it's a slow change. The US doesn't have foreign currency debt, and can print more US dollars as it needs to. When money managers were alarmed about tariff wars in April, US Treasuries still performed better than corporate bonds, even if prices for both sectors broadly fell. And foreign demand for Treasuries has remained resilient, with holdings climbing in May.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
But tightening corporate bond spreads in recent months may be a function of government debt looking relatively weaker now. The US government lost its last triple A grade in May, when Moody's Ratings cut it to Aa1. The bond rater pointed to factors including the widening deficit and the rising burden of interest, noting that payments will likely absorb around 30 per cent of revenue by 2035, compared with 18 per cent in 2024 and 9 per cent in 2021.
And US President Donald Trump's sweeping tax cut bill could add about US$3.4 trillion to US deficits over the next decade, according to projections from the nonpartisan Congressional Budget Office.
At the same time, corporate profits remain relatively strong, and although there are some early reasons for caution, high-grade companies are generally generating enough earnings to easily pay their interest now. More US companies are topping earnings estimates this reporting season than the same period last year.
Valuations for company debt have been high recently, reflecting investor demand for the debt. High-grade US corporate spreads have averaged below 0.8 percentage point, or 80 basis points, in July through Thursday. That's far below the mean for the decade of about 120 basis points, according to Bloomberg index data. Spreads for euro-denominated high-grade corporates have averaged about 85 basis points in July, compared with about 123 basis points for the decade.
To some money managers, high valuations for corporate credit are cause to be wary. Gershon Distenfeld, a fund manager at AllianceBernstein Holding, pared back a position that favoured credit risk to rates risk earlier this month. Dominique Braeuninger, a multi-asset fund manager at Schroders Investment Management, agrees that corporate bond spreads are too tight to make them attractive.
And even if BlackRock is generally positive on corporate debt, it is underweight long-term high-grade notes because spreads are tight, while being overweight short-term credit.
But to many market observers, the world appears to be shifting, and it makes sense to hold more corporate debt now.
'What we've seen on the government fiscal side is not great news,' said Jason Simpson, a senior fixed income SPDR ETF strategist at State Street Investment Management. 'Corporates seem to be chugging along nicely.' BLOOMBERG
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Times
an hour ago
- Business Times
China's US$11 trillion stock market is a headache for both Xi and Trump
[BEIJING] At the heart of why consumers in China save so much and spend so little, and why Xi Jinping and Donald Trump will struggle to change that behaviour even if they want to, lies the country's stock market. Even after a recent rally, Chinese indexes have only just returned to levels seen in the aftermath of a dramatic bubble burst a decade ago. Instead of incentivising consumers to spend, poor equity returns have nudged them toward saving. A US$10,000 investment in the S&P 500 Index a decade ago would now have more than tripled in value, while the same amount in China's CSI 300 benchmark would've added just around US$3,000. Part of the reason, long-term China watchers say, is structural. Created 35 years ago as a way for state-owned enterprises to channel household savings into building roads, ports and factories, exchanges have lacked a strong focus on delivering returns to investors. That skew has spawned a host of problems from an oversupply of shares to questionable post-listing practices, which continue to weigh on the US$11 trillion market. The country's leaders are under pressure to fix this. President Xi is counting on domestic spending to reach the 5 per cent economic growth goal, especially as a tariff war with the US heats up over the massive trade imbalance. At the same time, Beijing has reasons to keep prioritising the market's role as a source of capital: the country needs vast funding to nurture companies that underpin its tech ambitions – even if their profitability remains questionable. 'China's capital market has long been a paradise for financiers and a hell for investors, although the new securities chief has made some improvements,' Liu Jipeng, a securities veteran who teaches at China University of Political Science and Law, said in an interview. 'Regulators and exchanges are always consciously or unconsciously tilting toward the financing side of the business.' The limits of China's stock rally have again been evident this year. The CSI 300 has risen less than 7 per cent despite a burst of optimism over AI, trailing benchmarks in the US and Europe. The underperformance – along with factors including an uncertain economic outlook – helps explain China's extraordinarily high savings rate, which stands at 35 per cent of disposable income. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Chen Long, who works in the asset management industry, has taken to social media platform Xiaohongshu to warn people of the risks of chasing the recent rally. 'Many ordinary people come in thinking they could make money, but the majority of them end up poorer,' Chen said in an interview, adding that he has been investing since 2014. 'State-owned companies primarily answer to the government rather than shareholders, while many private entrepreneurs have little regard for small investors.' Over the past year, China's top leadership has shown greater awareness of the stock market's importance as a vehicle for wealth creation. That's especially the case with an ongoing property slump and a fragmented social safety net, which exacerbates a sense of insecurity. The Communist Party's Politburo pledged to 'stabilise housing and stock markets' in a December meeting – a rare expression of support for equities at the high-level gathering. The body also called for 'increasing the attractiveness and inclusiveness of domestic capital markets' in July. There is no quick fix to boosting household confidence 'except for a stock market rebound,' said Hao Hong, chief investment officer at Lotus Asset Management. 'This is a topic that we economists have been discussing in the closed door meetings in Beijing.'' In some ways, the market's malaise has been decades in the making. 'The exchanges are motivated to fulfill the government's call for increasing companies' financing,' said Lian Ping, chairman of the China Chief Economist Forum, a think tank that advises the government. 'But when it comes to protecting investors' interests, there are few who are motivated to do it.' An explosive growth in new listings made China the world's biggest IPO market in 2022. Yet insufficient safeguards for shareholders and lax oversight of IPO frauds have led to share price crashes and delistings – what retail investors refer to as 'stepping on a land mine.' Take Beijing Zuojiang Technology, which listed in 2019. The company said in a 2023 statement that its product was modelled after Nvidia's BlueField-2 DPU. The company warned in January the following year that it was at risk of being delisted, citing an investigation for disclosure violations. It was subsequently removed from the Shenzhen bourse. The China Securities Regulatory Commission didn't immediately reply to a fax seeking comment. Recent years have seen greater efforts to screen poor-quality IPOs and crack down on financial fraud. There's also a push to reduce additional stock issuances by listed companies and share sales by major stakeholders, while encouraging more corporate profit to be passed on to investors. There has been visible progress. Initial public offerings shrank to nearly a third of 2023 levels last year. Shanghai and Shenzhen-listed companies handed out a combined US$334 billion in cash dividends for 2024, up 9 per cent from the previous year, according to state media. 'The regulations and overall requirements after IPO have become stricter, in terms of reliability, transparency, or information disclosure,' said Ding Wenjie, investment strategist at China Asset Management. Reforms, however, have fallen short of transforming the market into one that prioritises investor returns. Even with the rise in share buybacks, CSI 300 companies spent only 0.2 per cent of their market value on repurchasing shares in 2024, far less than the nearly 2 per cent spent by S&P 500 firms, according to calculations by Bloomberg. The recent policy push to attract more tech listings is also a worrying sign for some investors. Regulators are resuming the listing of unprofitable companies on the STAR board, dubbed China's Nasdaq, while allowing them for the first time for the Shenzhen-based ChiNext board – which is earmarked for growth enterprises. IPOs so far this year have increased by nearly 30% from the same period in 2024. That's an inevitable move to secure capital for firms that are vital to China's battle against the US for supremacy in AI, semiconductor and robotics, but also signals that authorities may again be putting funding needs ahead of investor protection. Fast-tracking more firms to list without tackling the core problems of corporate credibility will 'just add volume without restoring investor trust,'' said Hebe Chen, an analyst at Vantage Markets in Melbourne. Stock exchange officials have been actively reaching out to investment banks and encouraging companies to file for IPOs, according to people familiar with the matter. Some high-quality tech applicants could get access to so-called 'green channels' for a faster review and approval process, the people said. 'The entire regulatory environments are still not up to the task of delivering the best out of those companies,' said Dong Chen, chief Asia strategist at Pictet Wealth Management. It requires a more comprehensive improvement of the institutional environment 'to provide the right incentives'' for companies to deliver values to their shareholders, he said. BLOOMBERG
International Business Times
2 hours ago
- International Business Times
One of America's Largest Semiconductor Companies Set to be Nationalized as Trump Admin Launches Its Own 'Manhattan Project'
The Trump administration has kicked off its own version of a "Manhattan Project" following reports that one of the country's biggest companies may be taken over by the government. Intel, the largest semiconductor fabricator in the U.S., has been in discussions with Donald Trump regarding a possible government ownership stake. Although the exact share being sought by Intel has not yet been disclosed, government takeovers of private companies are generally considered a measure of last resort during times of crisis. During the 2008 financial meltdown, the U.S. government took control of several banks, and in World War II it took control of several major logistics companies across the United States. Trump's Big New Project Intel's CEO Lip-Bu Tan X The latest move stems from concerns that the U.S. is overly dependent on TSMC, a Taiwan-based chipmaker, even as China continues to issue threats of invading the island. Such an invasion could cripple America's ability to compete in the rapidly expanding semiconductor market, especially as demand soars due to artificial intelligence. Although Intel's AI chips lag behind those produced by NVIDIA and AMD, the company holds a strategic advantage because it both designs and manufactures its own products. Semiconductor Wikimedia Commons Trump's plan is aimed at strengthening national security by bringing chip production back to U.S. soil. "This feels like the Manhattan Project - or the run-up to World War II," MIT AI computer scientist Dave Blundin said. "It's every bit as important as the space race was, as the nuclear arms race was. Actually, it's more important." Intel's cutting-edge semiconductor manufacturing capabilities could help the U.S. reduce its dependence on overseas chip factories—particularly those in Taiwan, which controls over 60 percent of the global market—while supporting artificial intelligence, national defense, and the broader economy. Intel Reuters Negotiations are still underway, with details continuing to take shape. According to a source cited by Bloomberg, the plan would involve the U.S. government purchasing a stake in the company. However, another insider stressed that these discussions are not guaranteed to result in an agreement and could end without a deal. Tech and AI specialists speaking on Diamandis' Moonshots podcast compared the initiative to a modern-day "Manhattan Project," describing it as a kind of "national survival strategy." "The reason the US needs to protect Taiwan fundamentally... is because the fabs are there. If the fabs all move to the US, then why would the US defend Taiwan?" Blundin said. Concerns Grow Over Nationalization Some have voiced concerns over the move to nationalize the company, with one observer noting: "They're putting the whole industry on a kind of war footing, like mobilization for conflict, except the battleground is supply chains and chip fabs." Donald Trump X In a statement to Bloomberg, Intel declined to address its talks with the Trump administration but said it remains "deeply committed to supporting President Trump's efforts to strengthen US technology and manufacturing leadership." "We look forward to continuing our work with the Trump administration to advance these shared priorities, but we are not going to comment on rumors or speculation," the company added. The move comes after two AI firms agreed last week to give 15 percent of their chip sales revenue from China to the U.S. government in return for export permits. According to three people with knowledge of the matter, NVIDIA and Advanced Micro Devices (AMD) struck this first-of-its-kind agreement with the White House to market and distribute their semiconductors in China. The agreement could generate over $2 billion for the U.S. government, though Trump has not specified how those funds would be allocated, according to the New York Times.
Business Times
2 hours ago
- Business Times
US-India trade talks scheduled for August called off
[NEW DELHI] A planned visit by US trade negotiators to New Delhi from August 25-29 has been called off, a source said, delaying talks on a proposed trade agreement and dashing hopes of relief from additional US tariffs on Indian goods from August 27. The current round of negotiations for the proposed bilateral trade agreement is now likely to be deferred to another date that has yet to be decided, the source with direct knowledge of the matter said. The US embassy in New Delhi said it has no additional information on the trade and tariff talks, which are being handled by the United States Trade Representative (USTR). India's trade ministry did not immediately reply to a Reuters email seeking comments. Earlier this month, US President Donald Trump imposed an additional 25 per cent tariff on Indian goods, citing New Delhi's continued imports of Russian oil in a move that sharply escalated tensions between the two nations. The new import tax, which will come into effect from August 27, will raise duties on some Indian exports to as high as 50 per cent – among the highest levied on any US trading partner. Trade talks between New Delhi and Washington collapsed after five rounds of negotiations over disagreement on opening India's vast farm and dairy sectors and stopping Russian oil purchases. India's Foreign Ministry has said the country is being unfairly singled out for buying Russian oil while the United States and European Union continue to purchase goods from Russia. REUTERS
