Disappointment over potential tax reform and volatility stemming from the French election pose the biggest threats to corporate bond and stock markets in the near term, according to Bank of America Merrill Lynch analysts.
Appetite for corporate bonds has proved unrelenting in the face of higher inflation expectations, rising interest rates and expectations of a more hawkish Federal Reserve — factors that would typically see investors turn away from companies’ debt.
At the same time, US equities have continued to rise to record highs. Tuesday marked 90 days in which the S&P 500 has avoided closing lower by 1 per cent or more and in February the index has enjoyed gains in 12 out of 14 trading sessions.
“Higher interest rates and inflation are not the biggest near-term risks to our bullish view on credit spreads,” said the BofA analysts.
“With the continued rally in equities instead we are getting to the point where we are most concerned in the near term about scenarios that led to a correction in stocks.”
The analysts point to two potential causes of a downturn in stocks. First, the uncertain French election, in which far-right candidate Marine Le Pen has gained ground, heightening concerns over the future of the single market.
And second, President Donald Trump’s pledge for “phenomenal” tax reform that the market has yet to receive details on. The “key uncertainty” will be the inclusion of a border adjustment tax that could be pushed back in Congress.
“As much of the recent rally in risk assets hinges on tax reform, such delays could be troublesome,” said the analysts.
With the creditworthiness of a company more closely aligned with movements in its stock price, a downturn in equities could see investors wanting to be paid more to hold corporate bonds as well.
Elsewhere, First Solar chief executive Mark Widmar is hoping for brighter times ahead after the company reported its biggest loss on Tuesday. It sent the company’s stock tumbling 8.3 per cent to $33.57 on Wednesday.
The US manufacturer of solar panels posted a fourth-quarter net loss of $719.9m, stemming from restructuring its production facilities and firing 1,600 workers. It comes after solar panel prices fell 35 per cent last year amid global oversupply. First Solar’s sales dropped 18 per cent to $2.95bn.
The story has been similar for other solar companies. Guggenheim’s Solar Exchange Traded Fund is down 14.4 per cent over the year, although its has seen some uptick in February.
The companies have also received little boost from the broad equity market rally, which has been attributed in part to expectations that Mr Trump will fuel US growth.
The new administration is seen as unfriendly to renewable energy, typified by the appointment of Scott Pruitt as head of the Environmental Protection Agency.
The broad S&P 500 index traded 0.1 per cent lower at 2,362.82. The Dow Jones Industrial Average moved up 0.2 per cent to 20,775.60 and the Nasdaq Composite inched 0.1 per cent lower to 5,860.63.
Get alerts on Corporate bonds when a new story is published