Credit markets update

Because we expect the cost of financing to remain elevated for US and euro corporates throughout the year and foresee an economic slowdown in H2 (but no policy rate cuts), we believe the market environment will remain challenging for corporates. That is likely to translate into higher high-yield (HY) default rates in the twelve months ahead. 

In this challenging context, we believe the risk premiums for HY over investment grade (IG) bonds could prove too low and we expect credit spreads to widen in H2. We keep our forecasts for much wider US and euro HY spreads by year-end and for some more limited spreads widening for US and euro IG corporates. 

This means that we continue to underweight HY corporate bonds but have a more positive view of their less risky IG peers. Indeed, we have an overweight position in euro IG, in keeping with our view that Europe will skirt recession and inflation will progressively come down, helping to reduce bond volatility. 

Overall, given their attractive yields, we keep our preference for short-term US and euro IG corporate bonds. Finally, in the banking sector our focus remains on senior debt, as the subordinated debt segment could still prove highly volatile in the more challenging market environment that likely lies ahead.