Buchanan’s confidence the rally has further to run stems from a positive outlook for economic growth and the attractiveness of US credit relative to other parts of the market due to loose monetary policy in Europe and Asia.
“We expect slow but steady economic growth and muted inflation, and although Brexit may induce a slight drag, the global recovery remains on track,” said Buchanan. “This is thanks in large part to central bank policies that have collectively infused $14 trillion into global economies, and until said economies demonstrate the ability to sustain growth without such support, we believe central banks will continue to be accommodative. This is a positive backdrop for credit, and the credit cycle certainly has more room to run.”
Buchanan explained that in his view a credit cycle does not play itself out purely through the passage of time.
“We don’t believe that credit cycles die of old age, rather because of overextended corporate balance sheets, or when companies become challenged to meet obligations,” he said. “Overall credit fundamentals are more than adequate and quite strong,” he said. “We see little evidence that balance sheets are over-levered and see ample evidence of significant liquidity to meet obligations. This supports the argument that the market remains in a favourable stage of the credit cycle.”
These arguments make sense, but as we have seen in the past markets do not always behave rationally, and a badly-handled rate rise could trigger trouble in credit markets once again.