European credit score markets have carried out properly just lately, all issues thought-about. The query now’s whether or not they’ve carried out too properly.

The ICE BofA Euro Company Index has returned a strong 3.2 per cent over the previous three months. And for its high-yield counterpart? Make that 6.3 per cent. Not too unhealthy for a area that solely expects to keep away from recession due to an unexpectedly heat winter and an Irish rescue (however the rising charges and close by battle).

Fund managers are actually evenly cut up about whether or not the “quick and livid company bond rally” has been warranted, based on Financial institution of America’s newest European credit-investor survey, out Monday.

On one facet, 41 per cent of surveyed buyers “say that the credit score rally was justified by a mixture of decrease recession fears, low-cost valuations, falling charges [volatility] and the return of inflows”, the financial institution writes.

On the opposite facet are the buyers — one other 41 per cent of respondents — who “say that the credit score rally has gotten forward of itself, as price hikes will hit the economic system with a lag, and markets are too optimistic on the expectation of price cuts.”

The financial institution’s strategists say the “ache commerce” for now’s even tighter spreads and even greater valuations. Fund managers are holding money; that is partly as a result of it now provides some yield, but in addition due to inflows from buyers. The money ought to present some “dry powder” in a market the place provide has been skinny, they add.

However on an extended timeframe, “valuations threat turning into a stumbling block for the credit score market as we head into Q2”.

One level of concern: the steepest credit score rebounds have occurred in the actual property/property and utilities sectors, each extremely delicate to rates of interest. These positive factors sign not less than some expectation of price cuts, which have been placed on maintain when the extensively anticipated EU recession by no means materialised.

Historical past isn’t working in credit score buyers’ favour, both: “credit score rallies this massive have solely ever been seen on the again of ECB largesse,” the financial institution writes, whether or not by way of price cuts or bond purchases. But as our colleagues Delphine Strauss and Colby Smith reported, ECB President Christine Lagarde has been hanging a tone that makes even Fed Chair Jay Powell sound dovish.

This all supplies attention-grabbing context to BofA’s breakdown of worries between buyers in high-grade and junk-rated bonds:

It’s all a bit robust to learn (regardless of the observe’s above-average graphic design). However the ballot exhibits that high-yield buyers are most anxious a few international recession, whereas investment-grade buyers fear a few central-bank “coverage mistake” (that means a steep international recession brought on by price will increase).

That is what you’d anticipate. Junk-rated credit score is extra delicate to development and investment-grade bonds carry out worse when rates of interest rise.

However it additionally reminds us that if there’s actually no energy-driven EU recession, the “coverage error” recession turns into the extra possible drawback for markets. IG buyers could wish to take observe.