Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Fixed Income Strategy
Investment-grade bonds are poised to benefit from a strong carry and the potential for tighter spreads. Although spreads have tightened from their peak, they remain appealing, particularly as the European Central Bank (ECB) prepares to cut rates. Currently, spreads hover around 110 basis points, which is still attractive compared to recent highs, and could tighten further.
Investors may continue to be drawn to the European investment-grade corporate space due to the attractive yields, which remain well above the 15-year average. Additionally, with expectations of a soft landing, the ECB may not cut rates as aggressively as the market anticipates. This could mean that the bond market narrative might echo that of 2022 and 2023, where building a buffer against elevated inflation proved to be a successful strategy. Investment-grade corporate bonds offer a yield premium over sovereign bonds while keeping investors insulated from the higher default risks associated with junk bonds.
Despite noticeable deterioration across the corporate bond spectrum compared to the pre-pandemic era, credit fundamentals in the investment-grade european space are proving resilient. Average corporate leverage, measured as debt over EBITDA, stands at 2.5x—higher than pre-pandemic levels but below the peak reached during Covid. Although average interest coverage dipped below 10x in the last quarter of 2023, there have been encouraging signs of recovery since then.
Credit upgrades (rising stars) are outpacing downgrades (fallen angels) by a substantial margin of 4 to 1, indicating strong overall quality in European investment-grade bonds. For context, the upgrade/downgrade ratio at the end of the last quarter of 2023 was much lower, around 1.36. As a result, default rates are expected to remain low, providing confidence to investors seeking solid returns in a more stable environment.
The multinational telecommunications company has a strong credit profile that may improve further due to several key factors:
The luxury car maker has a strong credit profile with potential for further improvement due to several key factors:
The British multinational tobacco company has a solid credit profile with potential for improvement due to the following factors:
The French energy company has a strong credit profile with potential for improvement due to the following factors:
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