Reopening old wounds – could wider European credit spreads signal more to come?

Evidence of growing concerns over high inflation, rate hikes and central banks withdrawing their asset purchasing support programmes has been particularly visible in European bond markets. For corporate bonds, this can be observed by looking at the spreads of European investment grade and high yield bonds versus German 7-10yr government bonds.

Despite the deteriorating economic outlook, they remained stable during much of the pandemic. However, as economic growth started to improve with the lifting of lockdowns, corporate bond markets became increasingly nervous by the prospect of the unravelling of easing policies, and supply chain disruptions and rising energy prices stoking inflation. This caused spreads to widen in the last months of 2021 and into 2022.

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