As a result of the European election and the following unexpected announcement of snap elections in France, French sovereign bond spreads have widened noticeably to the highest level since March 2013.
Market re-pricing accounts for the elevated political risk as both a left- or right-wing victory in France’s snap elections (to be held on 30 June and 7 July) would make fiscal consolidation even more unlikely and potentially complicate decision-making at French and EU level. There are three positive factors for credit investors. First, absolute yield levels in investment-grade (IG) and high-yield (HY) credit are trading above their 10-year average. Second, near-term recession probabilities in the EU and the US remain low. Third, further rate cuts by the Fed and the ECB in 2024 are expected. On the negative side, demand for credit is high and credit spreads are trading below their 10-year average, particularly in the US. European credit spreads vs. US are trading wider, given a higher exposure to geopolitical and elevated political risks. We are keeping our neutral stance on IG credit (in both USD and EUR) and HY USD credit but opting for a wider spread view for HY EUR credit. Over three months, we expect lower government bond yields in Europe and the US and a sideways move in Switzerland. The elevated US rates volatility, however, highlights risks around inflation and Fed policy rate cuts.
