chart of the week

Even before the European Central Bank has ended the current buying programme, ECB members are already working on a possible next programme. If you are still wondering whether the ECB’s policy might look different now that inflation is at record levels, you now have your answer.

Spreads on both corporate and high yield bonds have increased significantly in recent weeks. Nevertheless, especially the spreads on high yield bonds remain too low. Let’s get under the bonnet to explain why this is the case.

As the chart below indicates, corporate and high yield spreads are highly correlated. However, in recent weeks the spread combinations of both asset classes have been in the orange oval, indicating that high yield bonds are on the low side, compared to what you might expect based on history. The last data point is the pink square.

The latest edition of the Bank of America Global Fund Manager Survey shows that fund managers are still overweight equities while their expectations of future economic growth have fallen sharply.

In fact, the chart below shows that fund managers have never been so pessimistic about growth. Not during Covid and not during the Financial Crisis. The mismatch between expectations and positioning is extreme.

Most research papers on inflation focus on the period from 1950, after World War II, or from the 1980s after former Fed Chairman Paul Volcker destroyed inflation with a mighty series of interest rate hikes.