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US Inv. Grade credit has witnessed its weakest period since July 2014, posting 12 months of negative excess return on the back of fundamental concerns and re-leveraging. Yields are now nearly at their highest levels over the last 3 years (3.55%). What we see now is the later stage of a credit cycle. Armed with cheap funding, US corporations have re-leveraged their balance sheet with significant M&A activity (close to pre-crisis 2007 level) and share buyback program (highest level in 10 years) (Chart 3). Yet, the leverage should stabilise in 2016 thanks to synergies from the corporate activity (expected EBITDA growth of 8% and a moderate 5% indebtedness). Besides, companies are more prudent and have increased cash reserves by 25% to historical highs even if US companies are spending a lot on corporate investment activity. And finally, easier lending bank standard and better US economic perspectives should cap the default rate, rising only from 2.5% to about 3%-3.5% next year, compared to the 5.8% priced in by the market.
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