The Euro IG corporate index spread finished August 84bps over asw – higher than levels seen at the end of July. Euro credit is still feeling the hit of last month’s volatility spike, according to Boutaina Deixonne, head of Euro investment grade (IG) and high yield (HY) credit at Axa Investment Managers, with seasonally low liquidity in August amplifying the spreads movement.
In spite of this seasonality, Deixonne said, the primary market has been “extremely dynamic” over the month. €44 billion was issued, led by corporates including utilities, automotive and consumer goods. Books were oversubscribed, she continued, with a new issue premium of 5bps on average.In secondary markets, however, performance was more mixed, with no issuance in the HY market. Inflows into the asset class continued in both IG and HY.
Fears of a recession in the US and expectations of aggressive Fed cuts in the next months contributed to a significant increase in volatility over August, but “even if risks are slightly on the upside, we do not see this one single data as a sign of an upcoming hard recession in the US, but more a sign of a more balanced labour market”, Deixonne stated
She added: “The latest Institute of Supply Management (ISM) services’ Purchasing Managers’ Index (PMI) released confirmed this approach. Our base case still entails a soft-landing scenario. Consequently, we believe that the market has prematurely adjusted its expectations for rate cuts in the upcoming FOMC meetings and should start to reprice it out again.”
Looking ahead, “fears of US growth slowing materially will likely keep volatility elevated,” she noted. Investors are waiting on the August labour market report, due on 5 September.
In the next month and beyond, she added, “credit markets may struggle to perform well in the short term as sentiment will continue to be impacted by an expected high level of issuance.
“Seasonality is not great, as September used to be a weak month for fixed income. Although we think of a potential volatility in the very short-term, we maintain our constructive view on the asset class.”
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