Positive signs for Euro credit in 2022
Ongoing asset purchases and rising impact bond issuance may underpin the Euro credit market in 2022, according to Insight’s Responsible Horizons Euro Corporate Bond team.
The world stands at an inflexion point. Rising vaccination rates, bolstered by booster shots, have allowed most developed markets economies to reopen, with economic activity bouncing back as a result. Some countries are more advanced, such as the US, where the output gap is likely to be closing around now, while other areas, such as the Eurozone are still lagging behind their pre-Covid growth paths. This will have implications for future monetary policy, which is likely to start to diverge between Europe and the US.
The rapid recovery in demand, outpacing the rate at which supply chains could reopen, has squeezed prices upwards in certain sectors, compounded by elevated shipping costs and soaring commodity prices. In developed markets, bond purchase programmes are being brought to a close, and in some markets the timing of interest rate hikes is now an active point of discussion. Variations in future fiscal impulse complicate the outlook. In the US, the unprecedented fiscal stimulus will continue for some years to come, but most countries will experience some fiscal tightening in the year ahead.
As economic cycles mature and central banks start to withdraw monetary stimulus, market volatility tends to pick up – with the taper tantrum of 2013 an extreme, but recent, example. Given the slower recovery in the Eurozone, the European Central Bank (ECB) is likely to continue with a sizeable Asset Purchase Program for quite some time to come and rate hikes are unlikely before 2023 at the earliest. Ongoing monetary stimulus and ECB corporate bond purchases should thus continue to underpin the Euro credit market in 2022 as well.
Nonetheless, volatility might pick up – at least periodically – compared to 2021, and this could lead to times of spread widening especially in the earlier part of the year. This could well reverse again in the second half of 2022 to leave spreads largely unchanged over the year as a whole.
Issuance of EUR impact bonds gathered significant pace in 2021 and this is likely to continue into 2022 as well. Recently, about 25% of all new issuance in the EUR investment grade market has been in impact bonds. Especially sustainability-linked bonds are gaining increasing popularity and here we see the largest potential for growth in 2022.
GE774350 Exp: 31 March 2022