European Credit - September 2023

  • Sep 26, 2023

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European Credit

Credit markets have shown steady performance in recent months with spreads close to the post CS tights, after a short lived summer widening in August. Central banks from ECB t the FED have signalled a higher for longer rates mantra, underpinned by a relatively benign economic backdrop as inflation is still stubborn. The recent decisions at OPEC are pushing the oil prices back up complicating the medium term picture for the higher beta part of the credit spectrum, as idiosyncratic situation may emerge.

Overall High Grade credit remains an attractive area for investors, given the mixture of strong underlying fundamentals of the bulk of the members of the index and overall still elevated yield levels, close to multi year highs. However, the credit spread outlook is somewhat volatile given the  mixed recent inflation trends and with market risk still hard to predict. The situation in Ukraine doesn’t show signs of appeasement and remains a cause of uncertainty, albeit the market has grown used to it. China domestic economic uncertainties, mostly driven by the weakness in the real estate market there, add to the overall volatility in risk sentiment.

As a result, after a relatively prolonged rally since March until August and post the August wobble, synthetic indices are starting to widen somewhat in recent days with XO widening of 35bps since the mid September tights of 389bps to 423bps (from a March 515bps wide). Pre-invasion of Ukraine XO was in the 320 area. Main is  also 10bps wider at 78bps following the post CS tights of 66bps in July. 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.