An increase in inflation could cause the Fed to react without economic support
The interest rate outlook will remain critical to any upside in credit, while new data on the sustainability of recent employment and economic strength will also be an important factor for the US corporate bond outlook.
In the medium term, the new wave of tariffs could weaken the US growth outlook by increasing production costs, compressing corporate profit margins and reducing capital expenditure. In the absence of further corporate tax cuts or fiscal stimulus to absorb the extra production costs, US companies could increase product prices. A tail risk of this potential action is that the resulting upward pressure on inflation could then force the Federal Reserve to react by hiking rates without supportive economic conditions as the trade uncertainty is likely to affect employment and investments.
Investors are shunning US bonds
Since early May, concerns over the trade environment have been holding back investment decisions, and investors have favoured government bonds and money markets over equity ETFs in the search for safety. Investors have already begun to reduce their US holdings and look for opportunities elsewhere; US corporate bond ETFs recorded net outflows in the month to 22 May 2019.
BMOs corporate bond ETF range offers duration flexibility and regional diversification
Against this backdrop, global corporate bonds offer greater diversification benefits than US corporate bonds, as they are less directly exposed to the US-China trade dispute. The Bloomberg Barclays US Corporate index has an overweights in energy, IT and materials compared to the global aggregate corporate bond index – the very sectors most impacted by the trade tariffs. The BMO Bloomberg Barclays Corporate Bond (GBP hedged) UCITS ETF range provides investors with global credit exposure as subsets of the Bloomberg Barclays Global Aggregate Bond Index for various maturity buckets, offering duration flexibility and regional diversification.