In the last edition, we highlighted the relatively benign reaction of credit spreads compared to the drawdown of the equity market. This month, spreads started to play catch-up amid the escalation in the Ukraine conflict and hawkish comments from major central banks.

Regarding the ECB, an earlier exit from the pandemic asset purchase programmes and even a policy rate hike in 2022 seem possible, a scenario that financial markets deemed unlikely just a few weeks ago. Unsurprisingly, the increase in rates volatility in combination with the expectation of less central bank support led to a sharp repricing in risk: credit spreads widened by 33 bps in EUR and 15 bps in USD. With EUR credit spreads now at 138 bps we think the current level seems elevated for the underlying risk as economic data is still robust and should remain so amid ongoing reopenings after the “coronavirus winter”. While the geopolitical risk remains elevated, the impact of wars on financial markets has mostly been relatively short lived historically.

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