Recent high-profile bankruptcies of several US companies such as First Brands have raised concerns about declining credit standards but Charles Tan, co-chief investment officer of global fixed income at American Century Investments, has downplayed these worries.
“As we look at the market, we still think the broad credit markets are pretty healthy,” Tan said.
Speaking at a roundtable on 28 October, he acknowledged that while investment grade and high-yield bonds are currently at “all-time tights”, so, too, are all other asset classes at all-time highs – from equities to commodities.
“And the Fed is thinking financial conditions are still restricting, and they’re about to cut even more,” he said.
For his part, he said part of the reason why credit spreads have remained tight for an extended period is because there hasn’t been a “meaningful credit downturn” in some time, with the possible exception of the COVID-19 period.
Tan added that the credit market has also undergone significant changes, with many riskier credits now found in the bank loan markets, sale loan markets and, more recently, private credit and direct linking markets.
“When you have a rather benign credit environment for an extended period of time and when you also have a lot of new capital chasing opportunities, it’s no surprise that credit spreads tend to tighten, and that credit standards will also suffer,” he told the panel.
He linked this explanation to the recent high-profile bankruptcies of US companies such as auto dealer Tricolor and car parts manufacturer First Brands, also noting ongoing concerns regarding the credit exposure of some regional US banks.
However, Tan maintained that American Century is not anticipating a full-blown credit downturn in the foreseeable future.
“There are some instances where credit concerns have risen above, but that’s limited to certain areas more exposed to the weaker parts of the economy.
“So we don’t believe there is a widespread and systematic credit downturn over the horizon, at least at this point,” Tan said.
This view differs from that of Chris Willaton, Akambo chief investment officer, who previously noted that tight credit spreads and other indicators in private credit markets show similarities to warning signs observed before the global financial crisis.
At the same time, despite the ongoing impact of the US dollar’s direction and the country’s debt situation on US government credit, Tan emphasised that opportunities for both American and international investors persist beyond the US debt market.
“If you’re willing to travel overseas, you can go north and buy Canadian government bonds, and you can pick up 80 basis points, even after hedging back the US dollar so you don’t have any currency risk,” he said.
Likewise, he noted that long-term New Zealand government bonds can offer significantly more basis points compared to US Treasury bonds.
“And the best part is this, both countries, most of the DM countries, have a weaker economic outlook, right? So the central banks have more room to cut their rates,” Tan said.
In addition, he said emerging market debt has also been a “very bright spot” across the fixed income market, with Mexican bonds emerging as a particular standout.
