PARIS (Reuters) – The economic situation should stabilize in Europe and the ECB will reach its terminal rate, while the good performance of the bond markets could continue, estimates at Ostrum AM.
The eurozone is expected to post modest growth of 0.6% in 2023, but inflation forecast by Ostrum would reach 5.9%, against 5.5% for the market consensus.
As a result, the European Central Bank (ECB) could keep rates higher for longer than markets expect: Ostrum expects two more 25 basis point hikes in the next two meetings before a long pause and a first reduction possible from September 2024.
If the central bank were forced to tighten its monetary policy even further, it would probably shrink its balance sheet rather than raise its rate above 4%.
The end of the rate hike cycle is, on the other hand, favorable to credit, for which yields, all ratings combined, are already at 10-year highs: on good quality credit in euros (“investment grade”), the yield, at worst, reaches 4.34%, against 7.51% for the speculative category (“high yield”). The dividend yield of the EuroStoxx 50 reached, on June 23, 3.58%.
Bonds in Europe are also more pessimistic than equity markets, with the valuations of the Itraxx Crossover index suggesting a rise in the default rate to 5.8% over the next five years.
“A rise in defaults is inevitable: they are currently very low,” confirms Philippe Berthelot, director of credit and monetary management at Ostrum.
“However, the implicit levels of defaults seem too pessimistic to us: we anticipate a rise in this rate to between 3.5% and 3.8% this year”.
The bond markets could however have to face competition from the money markets at the end of the year, if the key rate of the ECB reaches 4%.
“There could be crowding-out effects, which would lead to a revaluation of risky assets: investors could prefer very safe assets with a yield of 4% to IG (“investment grade”) whose yield reaches 4 .34%”, explains Philippe Berthelot.
(Report Corentin Chapron, edited by Kate Entringer)
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