“I have a bad feeling about this.” Hans Solo’s famous catchphrase is how Commerzbank AG strategist Marco Stoeckle sees the bond market.
European credit markets have recovered since June, but the moves don’t make much sense as manufacturers face soaring energy prices and Germany tilts toward recession, Stoeckle, the bank’s head of corporate credit research, wrote in a statement. report on Friday.
He sees complacency in credit markets and urged investors to stay in high-grade bonds and hold more cash. Europe’s weak growth outlook will prevent spreads from tightening much further this year, Stoeckle added.
“Credit has staged an impressive recovery, but we are skeptical that it can last into the fall,” he wrote.
Since the end of June, A Bloomberg index of euro investment-grade debt is down 36 basis points to 183 basis points. It is still a long way from levels at the beginning of the year, when spreads hovered around 95 basis points.
Post-sell-off rally in blue-chip bonds ‘distorted’ European market
Stoeckle raised his estimates for European credit spreads and now sees investment grade ending the year at 105 basis points, 10 basis points above the previous target for the iBoxx index of European companies. The expected risk premium on bonds rated junk in the iBoxx euro high-yield capped index rose by 90 basis points to 500 basis points.
“We expect volatility to remain elevated and see significant downside risks before long,” the strategist wrote.. “We anticipate better entry points later in the year and suggest keeping cash levels above neutral.”