The upcoming US election could significantly impact tax policies, tariffs, risk sentiment, credit spreads, and US Treasury yields. While markets expect gridlock, a unified government poses an underappreciated risk to credit markets. Election outcomes will influence US corporate earnings, with financial markets reacting swiftly to anticipated changes. The base case scenario suggests a Kamala Harris presidency with a divided government (40% probability), a Republican sweep (35%), and a Democratic sweep (10%). There’s a 55% chance of policy changes leading to higher inflation, upward pressure on UST yields, and wider credit spreads, while a 45% chance remains for a neutral or positive impact. Changes to the corporate tax rate would broadly affect sectors, while increased tariffs will negatively impact most sectors, except for autos and capital goods.

We believe that the current bond supply still can’t meet investor demand given the excess liquidity from various factors. It is estimated that the total new issuances for Asian credits will be about USD 150 billion, while the total maturities along with the coupon payments are estimated to be about USD 242 billion. This effectively returns USD 87 billion of capital to investors, which could be reinvested in Asian credits. Moreover, it is projected that there might be incremental demand from Hongkong-based China asset managers due to more relaxed rules on tapping onshore funds, and private banks with sizeable money-market exposures that may start to rotate into credit.

We maintain our view that the US Fed is expected to cut 100 basis points this year, given the progress towards the 2% inflation target. With the projected rate cuts, we expect a significant portion of the estimated USD 6 trillion in money market funds and total global money market assets of USD 9 trillion to move into credits as US Treasury yields decrease. Moreover, we also expect that the spillover effect of the People’s Bank of China’s (PBOC’s) monetary easing will set up strong technicals for Asia credit. Currently, we favor credits within Southeast Asia and India. We are also on the lookout for credit upgrade stories in Indian and Indonesian corporations.