The threat of spread widening has been a near daily refrain across Europe’s high grade corporate bond market since the rally started at the end of last year. The question should be whether anything can stop them grinding ever tighter.
The first mention in GlobalCapital of widening came in November, when multiple investors said spreads could easily widen by 20%.
The iTraxx Europe Main closed at 79bp on that day, with the Crossover at 420bp. On Wednesday this week, those same indices closed at 52bp and 300bp, respectively.
Spreads have tightened throughout events that should, individually, be enough to make investors think markets are riskier.
These include rhetoric about nuclear arms in Russia’s war in Ukraine, the start of Israel’s war in Gaza, uncertainty about interest rates and persistent inflation and, most recently, a dismal first quarter reporting period for European companies.
With more than 60% of companies publishing their first quarter numbers as of Wednesday, earnings growth has fallen by 8%. In some sectors, such as industrials and energy, it is as much as 21%. Better than consensus, but still very far from good, or even neutral.
And yet, spreads tightened, with the Crossover starting Wednesday at 299bp — inside the psychological 300bp barrier that has only been crossed a handful of times this year.
The next thing touted to send spreads wider is the US presidential election in November. European bankers see it as such a major event that some have labelled 2024 as effectively a 10 month year for issuance.
But investors still have a mountain of cash to use, as is evident in the heavily oversubscribed books on this week’s only clear issuance day and the subsequent secondary market performance of even the most tightly priced trades. Coca-Cola brought the second tightest 20 year bond of 2024 this week and that still squeezed closer to mid-swaps a day later.
Maybe spreads will eventually cheapen. But as this stage the tightening feels unstoppable.