Credit Strategy Weekly Can yields give US a breather please

Credit Strategy Weekly Can yields give us a breather please?

Juan Esteban Valencia Sovereign bond sell-off pushes risk aversion higher almost everywhere… The war in the Middle East intensified this week, sending oil prices past $100 and driving up inflation expectations. The ECB hiked rates, and the markets priced even more rate increases to come. Sovereign bonds sold off quickly, and yields tested multi-year highs. Equities were not spared either, heading lower as risk aversion spread through the markets. Credit proved the exception. The various credit indices we follow barely registered any turmoil, with spreads remaining in very narrow ranges and some even inching a little tighter. Moreover, it wouldn’t be surprising if the higher credit yields start to attract even more cash into the asset class. We don’t see spreads tightening significantly from here, but neither do we expect a substantial sell-off this side of the New Year, and probably not before 2Q next year.

The list of risks keeps getting longer. A back-of-the-envelope list of risks to the credit markets currently include possible AI disruption to various industries, as well as very heavy issuance from hyper scalers, potential worries about Private Credit (not many headlines lately), geopolitical risks and oil prices, higher inflation and, more recently, increasingly high yields. In our view, none of these issues can, on their own, do any significant or sustainable damage to the credit markets, as long as the economy continues to grow. But the more issues the markets have to deal with, the less room for error there is.

Heavy new issue volumes, but nothing the market can’t take. The primary markets had a strong showing this week in both the euro and USD markets. The week started slowly given the US holiday, but by Tuesday volumes were rising and on Wednesday the euro market saw very strong issuance, led by the IG space. Overall, €27.37bn was priced, including several multi- tranche deals. The bonds were taken down with ease, even though one deal was pulled – the first this year. We believe the markets can absorb more (around €35bn+ in weekly issuance), although we don’t think we’ll see volumes that high very often.

Credit spreads remain stable 160

80 Jul-24 Jan-25 Jul-25 Jan-26 Jul-26

iBoxx Eur Corporates iBoxx USD Corporates

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Contents Summary...........................................................................................................................................3

Macro and single-name strategies .................................................................................................4 Macro Strategy...................................................................................................................................4

Strategy Scorecard ..........................................................................................................................5

The week ahead ...............................................................................................................................6

Market review and outlook.............................................................................................................8 Market review ....................................................................................................................................8 iTraxx and CDX markets.....................................................................................................................9 Cash markets ................................................................................................................................... 10 Yields and curves…