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European Credit

Credit markets have recovered well from the Silicon Valley Bank (SVB) and Credit Suisse situations, underpinning a strong resilience in the European IG space in the current higher yielding environment. Credit spreads are close to YTD tights seen in late January. Central Banks’ rate hikes are pushing risks up and idiosyncratic situations may emerge as access to funding and cost of funding may become more tricky. The uncertainties on inflation and the uncertainties on rates make the overall outlooks difficult to predict.

Overall yield levels are still much more attractive compared to early 2022 but the credit spread outlook is now more volatile as a function of this uncertainty. The recent inflation trends have been mixed at best and  recession fears are still present, market risk is still hard to predict. The rates market is showing considerable swings driven by changes in risk aversion. The situation in Ukraine doesn’t show signs of appeasement and remains a cause of uncertainty, but the market has grown used to it.

As a result, after a relatively prolonged rally since April, synthetic indices are starting to widen somewhat in recent days with XO widening 15bps in the last week following a significant 70bps rally since late April to 412bps (from a tight of 383bps in early February and a March 515bps wide). Pre-invasion of Ukraine XO was in the 320 area. Main is  also slightly wider at 78bps following a 15bps rally since end April. While these look still relatively elevated, implying multiple defaults, they remain an easy hedge as investors tackle volatility deriving from economic performances, market risk or geopolitical risk.