Tax Uncertainty and the Credit Markets

7 minute read

Proposed tax policy changes will be a net positive to the credit markets—increased free cash flow, incentives to reduce leverage, and improved market technicals through reduced supply—particularly over the near term. This justifies maintaining an overweight exposure to credit risk, particularly higher quality credit. However, investors must keep a close eye on company activities, such as increased M&A or shareholder-friendly uses of released cash, as well as that of the Fed, such as more aggressive balance sheet reduction or rate increases. Shifts in either could lead to unanticipated deterioration in market technicals or other disruptions to the credit market that result in wider spreads.