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European Credit

Credit markets have had a bit of shock following the events related to Silicon Valley Bank (SVB) after, what had been a strong start of the year. Credit spreads are close or back at YTD wides seen in early January. The resolution of SVB has been a wake-up call for markets. Central Banks’ rate hikes indeed are pushing risks up and more idiosyncratic situations may emerge as access to funding and cost of funding become trickier. 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 and recession fears have come down, market risk is less clear now. The market has priced in further rate hikes 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, synthetic indices weakened materially over recent weeks with XO widening a massive 125bps since early March to 511bps (from a tight of 383bps in early February. Pre-invasion of Ukraine XO was in the 320 area. Main is also materially wider at 104bps, while by historic standards these look too elevated, implying multiple defaults, yet they remain an easy hedge as investors tackle volatility deriving from economic performances, market risk or geopolitical risk.