Has 2024 been all about tighter spreads? Not everywhere...

September 2, 2024

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In his latest column on key developments, themes and opportunities in credit markets, Ian Horn explores what is happening to longer-dated spreads in European investment grade.

Long-end single-As have bucked the year-to-date trend and are wider so far this year (Figure 1).

In our March Close Up we discussed how credit spread curves were “humped, making longer-dated spreads look particularly tight”. We talked about how investors had chased longer-dated bonds to extend duration at a time of limited long-dated issuance. By doing so, investors were locking in attractive yields. But they were also driving significant compression in longer-dated spreads.

However, through 2024, we have seen this theme unwind for various reasons.

Longer-dated spreads have underperformed in 2024, particularly in the higher-quality single-A market. Figure 1 shows single A spreads in various parts of the market, rebased to zero as of December 31st, 2023. Spreads in the 10+ year part of the market significantly outperformed through 2023, tightening more than 50bps, compared to less than 10bps of tightening in the 1-5-year market.

These moves have partially reversed in 2024, with the 10+ year market widening by approximately 10bps, while the 1-5-year market has continued to tighten by around 20bps.

One key driver behind this has been lower yields as interest rates have rallied (Figure 2). These lower yields have pushed traditional ‘yield buyers’ who typically buy longer-dated credit to the sidelines. Compounding this, we’ve also seen a return of longer-dated corporate issuance in 2024, helping 2023’s supportive technical to unwind.

As a result, the ‘humped’ spread curves we referred to in March have normalised (Figure 3). We believe this theme can continue as European IG spread curves remain slightly inverted. However, meaningfully higher yields at the long end, driven by wider spreads or higher government bond yields, would likely see the return of ‘yield buyers’.

 

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of August 2024 and may change without notice.

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Index Descriptions

ER3V – The ICE BofA 1-5 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity less than 5 years and rated A1 through A3, inclusive.

ER31 – The ICE BofA 1-3 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity less than 3 years and rated A1 through A3, inclusive.

ER32 – The ICE BofA 3-5 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years and rated A1 through A3, inclusive.

ER33 – The ICE BofA 5-7 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years and rated A1 through A3, inclusive.

ER34 – The ICE BofA 7-10 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years and rated A1 through A2, inclusive.

ER36 – The ICE BofA 5-10 Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 10 years and rated A1 through A3, inclusive.

ER39 – The ICE BofA 10+ Year Single-A Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 10 years and rated A1 through A3, inclusive.

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