Credit continues to resist rising yields

The credit market has so far been extremely resistant to interest rate volatility for several reasons: The first is that real rates matter more than nominal rates for risk assets and they remain very low. Second, the fundamentals of corporate bond issuers continue to improve at a rapid pace, with twice as many rises as declines currently in Europe and default figures are declining since November 2020. Third, the strong focus on securities ECB financing conditions associated with the flexibility of purchases under its PEPP and CSPP is helping to maintain the volatility of credit spreads. Lastly, positioning is and should remain resilient without being overbearing.

Investors have mostly held their positions in corporate bond spreads, despite the previous year’s negative total returns for corporate bonds, possibly because insurers are supplanting traditional asset managers with higher returns. Therefore, while the advantages remain more limited than the potential disadvantages of credit spreads, we remain convinced that this strong technical and fundamental data remains favorable until the end of the year.

We expect a further tightening of 10 basis points for corporate bonds and 25 basis points for high yield bonds, and we continue to favor BBB, BB, corporate hybrids and AT1.

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