JP Morgan has widened its year-end spread forecasts for European credit, arguing that pricing across fixed income does not reflect weaker economic data and increasing geopolitical risk.
In its weekly report on Friday, the bank’s European credit strategists revised spread forecasts to 150 bps for investment-grade credit and 425 bps for high-yield.
The new targets compare to earlier forecasts of 120 bps in IG and 375 bps for high-yield, and imply a widening of 25 bps and 58 bps, respectively, compared to Thursday’s close, according to JP Morgan.
Analysts went into 2024 predicting that spreads would widen marginally this year due to the effects of higher rates on economic growth, but rock-solid technicals have led bond spreads in Europe defy that expectation. But now, a mixture of slowing US data and rising global risk factors have prompted analysts to revisit that view.
“The resiliency of credit markets could finally fail in the face of a potent cocktail of economic weakness, divergent pricing from rates and equity volatility, more balanced technicals, geopolitical risk, and an unwinding in stretched segments of broader financial markets,” JP Morgan said in Friday’s report.
In the euro high-yield market specifically, the bank’s analysts said that the excess spread to its projected estimate of default losses is close to its lowest in the past two decades, suggesting the asset class is “barely pricing any recession risk.”
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