Boutaina Deixonne, Head of Euro IG and HY Credit at AXA IM, comments on the evolution of the European credit markets in November and the outlook for the coming months.

Despite heavy supply, the Euro credit market has been stronger in November with the Euro BofA Merrill lynch index tightening by 0.07% to 0.90%, supported by the soft-landing narrative, dovish message from the Fed and cooling inflation numbers. In term of spreads, there was a large drop of volatility last month mostly to high yield over ¹  debt, but also subordinated over senior debt. Indeed, subordinated debt has outperformed in both financials (-0.16% on average) and hybrids (-0.10%). Cyclicals performed well with media (-0.14%), real estate (-0.10%) and automotive sectors (-0.04%). Real estate delivered a good return this month despite negative news around Heimstaden Bostad (+1.30%) a Swedish property company following news headlines around the corruption investigation at shareholders Alecta and CPI (+0.95%). Both CPI and Heibos bonds dropped by 4 points on average. The Euro High-Yield index also performed strongly with a tightening of 0.40% to 3.40%. Consumers, automotive and retail were the main outperformers. Real estate continues to be a drag, notably with Austrian group Signa’s default.

The rally in rates combined to tighter spreads resulted in the ICE BofA EUR Corporate index recording in November its best performance in over a year with a total return of +2.3%. The high-yield index performed well at +2.9%, close its best month since January.

Softer inflation data combined with slowing employment market and decelerating growth figures have extended the duration rally that started late October in Europe, reinforcing the view that central bank hike cycle is over. Weaker macro signals consolidate market consensus that rate cuts may come sooner; markets are now pricing that rate cuts will be on the agenda for the first half of next year rate. Whether central banks will be willing to cut rates that soon if growth holds up remains to be seen, we maintain our view that central banks have a low appetite for easing fast as the fight against inflation should remain their first focus. In this context, both German bund and 10Y UST notes went lower by almost 0.40% and 0.60% to 2.45% and 4.35% respectively.

After an underwhelming October, primary issuance has been more dynamic this month with over € 63bn of new debt issued, including three deals from real estate issuers (Gecina, Covivio and IHG). In line with trends seen over the recent months, corporates dominated the primary market with almost 63% of new issuance, where books oversubscribed over 3.4x notably for high beta bonds like APA hybrid and Vestas. For financials books were oversubscribed 2.7x. New issue premiums has decelerated over the month (0.13% on average) given a strong appetite from investors especially in the non-financials.

High-Yield issuance totaled around € 5bn this month with Lottomatica, Paprec and Styro notably. Given the risk-on mood this month, we have seen few AT1 deals in both Euro and USD markets from different banks. Books were oversubscribed and bonds performed well on the break. On the demand side, flows have been positive in both HY and IG. In IG, flows have been concentrated in the intermediate and long-term maturity.

As we leap into 2024, a notable deceleration in growth and inflation has taken centre stage, painting a picture of a subdued economic environment. The anticipation of a shift in interest rates adds another layer of complexity, as the trajectory seems poised for a decline in 2024. However, the path towards this decline is subject to the clarity of the inflation and growth outlook. As such, we do not rule out further volatility in credit markets in the first part of 2024. Having said that, while spreads may drift wider on recession risk, declines in rates will provide some support to the credit asset class, fundamentals and technicals being also supportive. 

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