Credit investors continue to buy up risky assets, compressing US credit spreads to levels last seen in the second half of 2021 when interest rates were largely negative.

European investment grade credit spreads remain above these levels due to a relatively weaker economic outlook, but investor appetite for risk persists, as evidenced by the aggressive bid for high beta segments such as corporate hybrids and subordinated financials. Despite high issuance levels in Europe and the US, new bonds are well absorbed and continue to outperform in secondary trading. While acknowledging the favourable economic backdrop combined with expected monetary easing, we find little value in the current market pricing and maintain a neutral stance on credit risk. The USD segment appears rich, with high yield spreads trading at the 6th percentile, just below 300bps. While an outright recession remains unlikely in the near term, renewed inflation acceleration poses a substantial risk. Should central banks be forced to pivot from their dovish stance, we could see fresh spikes of volatility and spread widening.

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