2024 | Quarterly Outlook | Credit

The second quarter of 2024 might well have been consigned to history as a very dull few months for corporate bond investors, at least within investment grade. Spreads, at already historically tight levels, continued their impressive grind tighter for the majority of the period – impervious to volatility in the rates market, ongoing geopolitical tensions and elevated levels of new bond issuance.

That is, until President Macron of France unexpectedly called for snap parliamentary elections – a risky gamble which potentially gives Le Pen’s right-wing party a route to government. To date, the subsequent volatility has been felt most acutely in French bank and sovereign bonds. The market’s key concern appears to center not on ‘Frexit’ but rather the prospect of fiscal largesse, exacerbating already stretched sovereign credit metrics.

At the time of writing we cannot know the ultimate outcome of the elections, however this episode serves as a timely reminder of the potential for meaningful volatility arising from unexpected events. Clearly, this is felt more acutely when valuations are high and consensus leans heavily in the same direction.

In the Quarterly Outlook I discuss:

• Credit spreads appear rich to history, but yields are higher

• The consensus economic base case may underprice the tails

• Technicals in credit are in charge, at least for now