Spreads are widening further and are expected to experience increased volatility due to the announced tariffs. The risk-off sentiment is likely to persist, leading to a slowdown in primary market activity during the upcoming volatile sessions. Within the credit space, many corporates and sectors will feel the pinch, looking more at the macro/rates environment and its focus on the negative impact on eurozone growth. Spreads have already opened up wider as sellers dominate. The iTraxx main has widened by 3bp this morning, now over 10bp wider compared to a couple of weeks ago.
The technical picture is shifting more negatively with outflows, high CSPP redemptions and potentially higher supply (via more Reverse Yankee supply and tariffs absorbing margins, weakening fundamentals), all adding pressure on spreads. And with a lesser dominant demand from yield to soften the blow.
Technical strength is showing signs of weakening, with another week of negative flows from mutual funds and ETFs. The changing rates environment, where the short end is unlikely to see further reductions and the long end is expected to rise, is diminishing the appeal of yield in credit. This is particularly concerning as the bund/rate component of the yield in credit is over 80%.
