European credit may be a very good place but the seismic shock that DeepSeek sent through US markets this week shows just how quickly good places can collapse.
European high grade credit funds have been hugely popular for 12 months now, with some estimates putting the net amount pouring into them in 2024 at €30bn, and more has continued to funnel in this year.
This wave of money has led to some unusual trends appearing. The credit market is now less volatile than the rates market, which is against the natural order as it implies banks and companies are safer investments that European governments.
This was perhaps best exemplified earlier this month when Swiss company Nestlé sold a bond in euros inside French government bonds.
Another strange trend is that average new issue concessions for much of January were sub-zzero for high grade corporate issuers, and last week rose to 1bp. This is well below the 10bp average paid by investment grade companies in 2024.
This is a bitter pill for investors to swallow, as January is usually the month where higher issuance volumes give them the chance to turn the screws on issuers over pricing.
Too good to last
All of this means it can be easy to forget how quickly things can change.
US equity markets tumbled on Monday, with a jaw-dropping near $600bn wiped off Nvidia’s market capitalisation in a day. Meta and Google also saw heavy selling, as did energy companies that were a proxy play on AI because they would power the technological revolution.
Chinese AI start-up DeepSeek drove the panic. Its AI model overtook the US’s ChatGPT as the most downloaded free app on Apple’s US App Store.
DeepSeek does what a lot of other generative AI companies do. But DeepSeek does it cheaper than its US rivals. It is around 50 times cheaper than OpenAI’s ChatGPT, according to DeepSeek, though some technology experts have questioned the veracity of that figure.
Almost overnight, investors were reassessing the US’s place as the leader in AI, with China seemingly able to provide a viable and possibly cheaper alternative.
A intense shift
There are a few factors that could quickly reverse the goodwill in credit. US president Donald Trump's status as an ever looming agent of global chaos and the divergence of central bank interest rates are the two most obvious candidates. But, like DeepSeek, the biggest shocks are unanticipated.
This will likely show up first in sectors already suffering. The auto sector is trading far wider to where it was this time last year – around 50bp – because its has fundamental problems, again partially stemming from Chinese competition.
So let DeepSeek be a lesson for Europe’s soaring credit markets. The more money that floods in, and the more a market looks like a sure thing, the harder it will be hit when things change.