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Taxing Times

18 January 2018 by lberuti

Over the last few sessions, despite stocks continuing their march higher, credit has been observing a pause. Credit indices have stabilized and traded in a very narrow range in Europe and started a slight drift wider in the US. Obviously, the increase in interest rates played a part in calming the indiscriminate buying that took place on credit instruments at the beginning of the year. But people were also mentioning the tax reform as a potential contributing factor to this newfound caution. For years, the likes of Apple and Microsoft have stashed billions of dollars offshore to slash their US tax bills. Now the rewrite of the tax code could throw that into reverse. If these corporates begin to repatriate money to fund share buy-backs or pay dividends, they could start to lighten up on their massive US treasuries and US investment grade corporate bonds inventory. They could let them mature or sell out. Because the size of their holdings is staggering, it might have given some investors food for thoughts. It is only a technical aspect, but it sometimes dwarfs fundamentals. It is quite possible that some clients looked at hedgeless portofolios and begun to protect them a little with some CDX IG purchases.