The down-to-the-deadline nature of Trump’s trade policy has
created market uncertainty. Our Head of Corporate Credit Research
Andrew Sheets points out a silver lining.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Today I’m going to
talk about a potential silver lining to the significant uptick in
uncertainty around U.S. trade policy.
It's Wednesday, February 12th at 2pm in London.
One of the nuances of our market view is that we think credit
spreads remain tight despite rising levels of corporate
confidence and activity. We think these things can co-exist, at
least temporarily, because the level of corporate activity is
still so low, and so it could rise quite a bit and still only be
in-line with the long-term trend. And so while more corporate
activity and aggression is usually a negative for lenders and
drives credit spreads wider, we don’t think it’s quite one
yet.
But maybe there is even less tension in these views than we
initially thought.
The first four weeks of the new U.S. Administration have seen a
flurry of policy announcements on tariffs. This has meant a lot
for investors to digest and discuss, but it’s meant a lot less to
actual market prices. Since the inauguration, U.S. stocks and
yields are roughly unchanged.
That muted reaction may be because investors assume that, in many
cases, these policies will be delayed, reversed or modified. For
example, announced tariffs on Mexico and Canada have been
delayed. A key provision concerning smaller shipments from China
has been paused. So far, this pattern actually looks very
consistent with the framework laid out by my colleagues Michael
Zezas and Ariana Salvatore from the Morgan Stanley Public Policy
team: fast announcements of action, but then much slower ultimate
implementation.
Yet while markets may be dismissing these headlines for now,
there are signs that businesses are taking them more seriously.
Per news reports, U.S. Merger and Acquisition activity in January
just suffered its lowest level of activity since 2015. Many
factors could be at play. But it seems at least plausible that
the “will they, won’t they” down-to-the-deadline nature of trade
policy has increased uncertainty, something businesses generally
don’t like when they’re contemplating big transformative
action.
And for lenders maybe that’s the silver lining. We’ve been
thinking that credit in 2025 would be a story of timing this
steadily rising wave of corporate aggression. But if that wave is
delayed, debt levels could end up being lower, bond issuance
could be lower, and spread levels – all else equal – could be a
bit tighter.
Corporate caution isn’t everywhere. In sectors that are seen as
multi-year secular trends, such as AI data centers, investment
plans continue to rise rapidly, with our colleagues in Equity
Research tracking over $320bn of investment in 2025. But for
activity that is more economically sensitive, uncertainty around
trade policy may be putting companies on the back foot. That
isn’t great for business; but, temporarily, it could mean a
better supply/demand balance for those that lend to them.
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