Fixed Income Investment Director explains his outlook for the global and US economies and how that feeds into a constructive view of US corporate credit
For all the talk we’ve heard this year about the end of US asset exceptionalism, the issue of rising sovereign debt, and the risks of a positive correlation between equities and government bonds, Naoum Tabet still sees opportunity in certain US fixed income markets. The Fixed Income Investment Director for Canada at Capital Group, explained that his economic outlook still shows some opportunity for growth in the United States, at least relative to Canada. In the context of a global slowdown as advisors seek ways to diversify their fixed income allocations, Tabet argues that US corporate debt can play an important role.
Tabet outlined his broad economic outlook for the US and Canada, explaining why the US might have some room to run on its fixed income markets, both sovereign and corporate. He explained where he sees opportunity in US corporate credit, in particular, and how advisors can use that asset class now. He explained, too, why bond markets’ reaction to the US ‘Big Beautiful Bill’ was somewhat muted, despite the apparent deficit increases that came with this act. His outlook rests on the fact that the United States currently has more room to cut interests rates than Canada does.
“We anticipate the US to cut materially more [than Canada], anywhere between 50 and 100 basis points could be foreseeable. We don’t expect interest rates to rise materially in the US,” Tabet says. “The second piece is growth. Right know all we know is that global growth is likely to slow down and moderate because of the weaponization of capital and tariff wars. I expect that the US is likely to continue to grow at a good pace, between 1.5 and two per cent over the next four quarters. Canada is probably likely to slow down materially, due to tariffs and the fact that we’re so reliant on the US. That will have an impact on bond spreads.
“But you have an interesting situation that doesn’t make a lot of sense to me: bond spreads are pretty tight in Canada, almost as tight as US spreads. You have a US economy that is growing at a faster pace, but the compensation for risk is the same from a spread standpoint.”
Despite the uncertainty and liquidity issues that could inform those tight US bond spreads, Tabet notes the bond market has so far treated the US relatively kindly, despite additions to the US deficit in the Big Beautiful Bill. He notes that US debt to GDP, despite being around 120 per cent, is still nowhere near as high as some other developed economies — like Japan at 260 per cent.
Tariffs, too, are having some of their desired impact on US deficits. Looking at tariff incomes just for May, Tabet notes that the United States took in $22 billion in additional monthly tariff revenue. Projected out, that revenue can cover most of the deficit additions in the Big Beautiful Bill. At the moment, markets are taking those numbers onboard and bond vigilantes aren’t pushing up the yield of the 10 year US treasury.
While there has not been a bond market apocalypse in the same vein as Liz Truss’ disastrous 2022 mini budget, the ongoing uncertainty around sovereign debt and global economic forecasts have made some analysts predict less stable return profiles from traditional government bonds. Those predictions may have advisors looking more closely at the corporate bond market. Tabet notes that as corporate credit can often have equity-like behaviour it does not necessarily offer the same non-correlated returns profile that some investors seek from government debt. That said, he notes there may be some significant areas of opportunity in the right subsets of corporate debt.
Advisors, Tabet notes, must grapple with the sheer scale of the corporate bond market as they seek areas of wider spread to capitalize on. In Canada alone there are about 250 public corporate debt issuers. Globally, there are over 10,000. Canadian corporate bonds tend to come from three sectors: financials, energy, and utilities. Those three sectors are already somewhat interconnected given how much money Canadian financials lend to the energy sector which, in turn, supplies the utilities sector. More broadly, Tabet believes that in the context of a slowing economy the Canadian corporate debt market is expensive and at risk of widening spreads, which would negatively impact prices.
US corporate bonds, despite quite tight spreads, come with stronger underlying fundamentals given Tabet’s view of stronger US GDP growth. While tight spreads might mean there is limited appreciation opportunity, the total yields being offered in US corporate credit are attractive and the default risk looks quite low.
“There's an opportunity to take advantage of that really attractive level of income that is generated from corporate bonds globally,” Tabet says. “Obviously, you need to find it. You need to work hard to define which regions and which corporate bonds and companies you want to lend money to.”
