Listen to the latest episode of Credit Exchange with Lisa Lee
Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2025. All rights reserved. Available by subscription only.
Opinion Credit
If Donald Trump causes a collapse in equity prices, IG credit should be a safe haven
by Duncan Sankey
Duncan Sankey
Portfolio director and head of credit research
Cheyne Capital
When valuations are this heady, policy missteps will be punished
As I write, we are 52 points short of the all-time closing high of the S&P, the cyclically adjusted price/earnings ratio for US stocks is hovering at pre-Wall Street Crash levels, and US IG and double B (and EU single B) spreads are trading sub-10th percentile on a 20-year retrospective. Leaving aside for a moment the smouldering embers of the Israel-Iran ceasefire and the Russia-Ukraine conflict — the markets seem inured to geopolitical risk without a direct recessionary impact — in two weeks’ time President Trump’s moratorium on reciprocal tariffs draws to a close. He will then have to decide whether to ‘chicken out’ (again) or reimpose trade terms that would likely precipitate a recession. What could possibly go wrong?
Arguably, not much. Underpinning the snap-back in markets from post-Liberation Day wides was not so much confidence in Trump’s ability to craft trade deals (US bilateral trade deals have, on average, taken 18 months to negotiate and 45 months to implement) as the weight of liquidity looking for a home, which bought the dip. This has not materially changed. Assets in US money market funds stand at a record USD 7.4tn; TTM ETF flows into US IG, although levelling off, have increased significantly over the course of the year and continue to rise in Europe. While foreign flows into US corporate bonds slowed in March and reversed in April, this follows hefty inflows during 2024. A decision by Trump to quit while he’s ahead and stick with 10% global tariffs (or just extend them while dangling the threat of more swingeing levies in a bid to bring those more refractory parties — the EU — to heel) could see foreigners regain confidence in dollar credit assets. Net supply in IG remains quite constrained, creating a scenario in which tight spreads could actually tighten further.
Rich consumers are propping up US growth
But when valuations are this heady, policy missteps — especially those that usher in a downturn — will be punished. In this context it is worth considering the feedback loop that has developed in the US economy. It is the wealthiest consumers that have underpinned America’s impressive GDP growth: the top two US wealth quartiles account for a disproportionate 65% of consumer spending. Greater access to financial and property assets than less well-heeled quartiles has insulated them from the vicissitudes of both prices and the labour market. Conversely, they have a much larger proportion of their wealth in equity/mutual funds and other financial assets, both historically and compared to other groups. Indeed, US households in total have about 38% of their assets in corporate equities and mutual funds — a higher level than that which has prevailed historically — with the richest households allocating as much as 70% of their wealth to equities. A sharp reversal in market fortunes precipitated by fears of a slowdown could therefore precipitate a vicious circle of reduced consumption, a weakened economic outlook and further liquidation of risk assets.
While a return to reciprocal tariffs could certainly trigger such a chain reaction, there are plenty of other elements of Trump’s economic heterodoxy — unsterilised fiscal largesse, co-opting of independent federal actors, lack of regard for price stability — that could spook the markets.
IG companies can cope with a downturn
Against this uncertain backdrop, there are worse places to be than IG credit. By no measure is it cheap at current levels, but it still prices in default risk at about five times the historical average of any five-year cohort over the past 55 years. Moreover, with a sizeable proportion of IG companies capable of meeting two-to-three years of debt maturities without recourse to refinancing, and enjoying historically fat margins, explicit default risk in this corner of credit seems remote.
Given the elevated default risk premium in IG relative to historical experience, investors are better off leveraging IG than sitting tight in HY (especially Bs to triple Cs) and waiting for distress to manifest in higher default rates and distressed exchanges. Moreover, ahead of market distress, investors will benefit from owning corporate IG through a combination of CDS plus government bonds rather than corporate bonds. When the market experiences dislocations, the funding constraints on cash bonds can lead to them materially underperforming CDS, which are unfunded instruments. (This was most clear during the onset of the pandemic.)
Once the distress has manifested, investors can then lock in their gain and switch back into cash bonds at a more favourable level. So, if Trump doesn’t chicken out this time, credit investors don’t need to either.
