"US Soft Landing, European Slump"... Next Year's Economic Outlook Seen Through Corporate Bond Yields

Triple C Corporate Bond Yield Spread Hits Largest in 14 Years
Europe 19.66%, US 13.47%
Eurozone Hard Landing Concerns... US Hopes for Soft Landing

The yield spread between the lowest-rated corporate bonds in the U.S. and Europe has surged to its highest level in 14 years. Analysts say this reflects the divergent economic outlooks, with the U.S. economy expected to achieve a soft landing next year while Europe is entering a recession phase, which is directly mirrored in corporate bond yields.

According to the ICE Bank of America (BofA) index on the 20th (local time), the average yield on European corporate bonds rated at the lowest level, 'Triple C (CCC)' or below, currently stands at 19.66%. This is more than 6 percentage points higher than the average yield of 13.47% for the lowest-rated U.S. corporate bonds. As a result, the yield spread between the lowest-rated corporate bonds in the U.S. and Europe has widened to its largest gap since the 2009 global financial crisis this month.

The credit spread, which is the difference between yields on the lowest-rated corporate bonds and government bonds, is 18 percentage points in Europe and 9 percentage points in the U.S., resulting in a 10 percentage point difference between the two regions. The spread on U.S. CCC-rated corporate bonds has narrowed by 1.62 percentage points since early November and further tightened by 0.81 percentage points this month. In contrast, European corporate bond spreads have only narrowed by 0.04 percentage points in November and 0.2 percentage points in December. This means Eurozone companies must pay significantly higher costs to raise funds compared to U.S. companies.

Christine Lagarde, President of the European Central Bank (ECB)
[Photo by Yonhap News]

This reflects the bleak economic outlook for Europe next year. The Eurozone economy is rapidly cooling due to the cumulative effects of tightening. Meanwhile, the U.S. economy is showing signs of stabilization in inflation and employment following the Federal Reserve's rapid interest rate hikes, with consumption and growth remaining robust, raising expectations for a soft landing.

Thorsten Slok, Chief Economist at investment firm Apollo, diagnosed the yield spread between the two regions' corporate bonds by saying, "Unlike the U.S. soft landing outlook, Europe mainly reflects fears and risks of a recession." Mike Scott, Head of Global High Yield Bonds at hedge fund Man Group GLG, analyzed, "Europe appears clearly more vulnerable than the U.S. conditions," adding, "It is highly likely that Europe was already in recession or very close to it in the third quarter of this year."

This trend is also confirmed in growth forecasts for the two regions. Earlier, the International Monetary Fund (IMF) lowered its economic growth forecast for the Eurozone this year from 0.9% to 0.7% in October. The forecast for next year was also revised down from 1.5% (July forecast) to 1.2%. In contrast, the IMF raised the U.S. growth forecast to 2.1% this year and 1.5% next year, up by 0.3 and 0.5 percentage points respectively.

In particular, the European Central Bank (ECB) recently revealed its hawkish stance at its monetary policy meeting, further fueling market concerns about a hard landing. ECB President Christine Lagarde dismissed expectations of a pivot by stating after holding rates steady on the 14th, "There was no discussion of rate cuts at this meeting." This contrasts with Fed Chair Jerome Powell’s remarks on the 13th that "discussions about when policy easing (rate cuts) would be appropriate have become more visible."

Economist Slok said, "Triple C corporate bonds in the U.S. and Europe reflect concerns about recession," adding, "(Europe’s) Triple C-rated corporate bonds are struggling in a recessionary environment." He further projected, "If concerns about a U.S. recession no longer exist and concerns about a European recession are much greater, it is reasonable for the corporate bond yield spread to widen further."

This content was produced with the assistance of AI translation services.