Commerzbank Uses Star Wars to Explain ‘Bad Feeling’ in Bonds
“I’ve got a bad feeling about this.” The famous Hans Solo catchphrase is how Commerzbank AG strategist Marco Stoeckle sees the bond market.
(Bloomberg) — “I’ve got a bad feeling about this.” The famous Hans Solo catchphrase is how Commerzbank AG strategist Marco Stoeckle sees the bond market.
European credit markets have rallied since June, but the moves don’t make a lot of sense given that manufacturers are facing skyrocketing energy prices and Germany is tipping toward recession, wrote Stoeckle, the bank’s head of corporate credit research, in a report on Friday.
He sees complacency across credit markets and urged investors to stay in high-grade bonds and hold more cash. Europe’s weak growth outlook will prevent spreads from tightening much more this year, Stoeckle added.
“Credit has staged an impressive recovery, but we are skeptical it can extend through the autumn,” he wrote.
Since the end of June, a Bloomberg index of euro investment-grade debt has narrowed 36 basis points to 183 basis points. It still a long ways off from levels at the start of the year, when spreads were about 95 basis points.
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Stoeckle raised his estimates for European credit spreads, and now sees investment-grade ending the year at 105 basis points, 10 basis points above the previous target for the iBoxx euro corporates index. The expected risk premium in junk-rated bonds on the iBoxx euro high-yield capped index were raised by 90 basis points to 500 basis points.
“We expect volatility to remain elevated and see significant risks of a setback before long,” the strategist wrote. “We anticipate better entry points later in the year and suggest keeping cash levels above neutral.”