European markets have been on a wild experience

Good morning. That is Harriet Clarfelt, standing in for Mr Armstrong as he takes a much-deserved break day. Complaints to him, some other feedback to me, please: harriet.clarfelt@ft.com.

I actually was on vacation simply final week; one thing that Rob maybe took into consideration as he sought out a well-rested colleague, contemporary from sunnier climes.

Little likelihood on the climate entrance, provided that I ventured again to my hometown, London. However, usefully, a quick hop throughout the continent to Austria and France did immediate me to take a better take a look at European markets. (And dumplings, schnitzel and lots of different starchy meals merchandise . . .)

Which leads me on to . . . OATs

French authorities bonds, aka OATs (brief for obligations assimilables du Trésor), have had a unstable time since President Emmanuel Macron referred to as snap parliamentary elections two Sundays in the past.

The ten-year French bond yield surged final week as the worth of the instrument fell, and the unfold or hole between French and German benchmark yields — seen as a barometer for the danger of holding France’s debt — rose to greater than 0.8 share factors final Friday, its widest degree since 2017.

As has been well-documented by my colleagues, different French markets have additionally come underneath stress over the previous fortnight as buyers digested the opportunity of a far-right authorities with huge spending plans, and the formation of a leftwing bloc that would erase Macron’s centrist alliance.

Final week marked the worst decline for the Cac 40 index since 2022, and — as I’ll focus on — European company borrowing premiums leapt larger.

So: 1) What do these larger premiums imply for corporations with euro-denominated debt obligations? and a pair of) May this bout of volatility current a possibility for would-be buyers?

My solutions, in short, are: 1) Firms tapping the European investment-grade bond market now should pay the very best premium in a number of weeks to problem debt — not perfect in the event you’d been planning to get a giant deal away any time quickly.

And a pair of) Possibly — in the event you consider that any additional turmoil will probably be shortlived past the two-round French political contest going down on June 30 and July 7. Though, after all, particular person credit score choice is essential — after which there’s the truth that France is way from the one nation holding elections this 12 months.

First, some numbers. The common euro investment-grade unfold — the premium paid by debtors to problem debt over equal German Bund yields — sits at roughly 1.2 share factors, having final week touched its highest level since February.

That’s nonetheless a lot decrease than it was six months in the past, however significantly larger than early June’s degree of simply 1.06 share factors.

The common high-yield, or “junk” unfold, can also be a lot decrease than it was final 12 months, however has climbed sharply from 3.21 share factors to simply underneath 3.5 share factors this month, in line with Ice BofA information.

For Goldman Sachs’ chief credit score strategist Lotfi Karoui, such strikes replicate “uncertainty [about] the outcome over the election, and the lack of clarity that investors have about the economic agenda of various players”.

True, US company bond spreads have additionally expanded in June. However the transfer has been much less pronounced than throughout the pond — and that lack of direct correlation means the hole between the 2 areas’ investment-grade spreads reached its widest degree in 4 months earlier this week.

So, some is likely to be tempted to hang around briefly within the greenback market till volatility calms down in Europe. In an indication of the US market’s openness to new issuance — and protracted demand from buyers — numerous huge offers have landed this week, with House Depot finishing a nine-part $10bn bond sale on Monday.

However might we be witnessing extra of an enduring shift? There’s an argument that spreads have been just too slim for the danger they have been imagined to be reflecting earlier than, and it was about time for a widening. Certainly, Man Group’s Mike Scott notes: “France [has] provided a catalyst for the reassessment of risk — which had not been appropriately priced.”

Analysts at Deutsche Financial institution wrote this week that they’re “still comfortable with credit on an absolute basis” and that “the odds of a European systemic political shock are overstated”. However they added that European credit score ought to now commerce with a wider unfold to US credit score, “both on political fears, and an ECB seemingly hesitant to diverge from the Fed” with reference to rate of interest cuts.

In equity, euro credit score spreads have really edged a little bit decrease from the place they have been final week. (Selecting to jot down a couple of subject, after which desperately watching the pattern begin to unwind, is an occupational hazard of a markets journalist.)

This is likely to be a sign that considerations are starting to ease already.

And in the event you consider that markets’ worst political fears are unlikely to be realised, and that volatility gained’t final for too lengthy, then this might be a pleasant second to scoop up some barely cheaper debt.

“People were complaining about tight credit spreads,” notes Vontobel’s Christian Hantel. “If you look now at the widening in Europe — and assuming that the damage on the political landscape in France could hopefully be limited — it could be an interesting entry opportunity for investors.”

JPMorgan analysts concur. “In our view, while there are many risks, this situation ultimately provides a buying opportunity,” they wrote final Friday, noting that “European investors are no stranger to political risk.” In the meantime, “technicals” — specifically investor inflows into euro high-grade bond funds — have remained “extremely strong”.

My view? Opportunistic shopping for on the idea that volatility will proceed to ease nonetheless requires a healthy dose of judiciousness about particular person corporations’ prospects — and credit score high quality — in any political situation.

To not point out a recognition of the broader worldwide context we discover ourselves on this 12 months, with UK elections touchdown between France’s two rounds, and naturally, the US election looming in November.

Then there’s the query of when and the way far central banks will lower charges . . . and the controversy concerning the broader financial outlook.

For Man Group’s Scott, “volatility is here to stay” as numerous elections play out — however so far as high-yield credit score goes, “the bigger thing in general is going to be the growth backdrop”.

Defaults diverge

The most recent month-to-month company default stories are out, and — opposite to among the fears being espoused prior to now 12 months, issues don’t look too dangerous. However they don’t look too good both.

International defaults totalled 14 in Could, in line with S&P International Rankings, taking the year-to-date whole to 69. That’s two fewer than the comparative interval in 2023. However as S&P says, it’s nonetheless “well above” the five-year common.

Could’s default numbers additionally spotlight the theme of regional divergence. US defaults final month have been larger than these in Europe — at 9 versus 4. However whereas US defaults really dropped month-on-month, Europe’s defaults held regular, conserving the area’s year-to-date tally at its highest since 2008, at 19.

Furthermore 11 of these European defaults have been so-called distressed exchanges.

Any such debt-exchange transaction will help corporations (and their private-equity backers) keep away from costly chapter proceedings — although our earlier reporting signifies that distressed exchanges can sometimes simply kick the can down the highway in direction of the courtroom, anyway.

S&P and Moody’s do anticipate default charges to pattern decrease over the following 12 months. However that’s contingent to some extent on the trail of rates of interest, progress and geopolitical developments.

Weaker company debtors — and notably leveraged mortgage issuers, whose debt prices float up and down with prevailing rates of interest — will probably be keenly trying to find indicators of aid on the horizon. The difficulty is that central banks are unlikely to quicken the tempo of mentioned aid until they’re dealing with sharply slowing progress.

And that atmosphere wouldn’t be nice for highly-indebted, low-quality corporations both.

One good learn

Hertz raises contemporary money for respiration room.

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