(Bloomberg) -- European credit risk indexes have fallen to the lowest in more than two years as investors bet that central bankers will be successful in taming inflation.
The Markit iTraxx Europe index tracking default risk for high-grade firms has dropped to 56.1 basis points and its lowest since January 2022, according to data compiled by Bloomberg. A similar gauge tracking junk-rated corporate bonds is also back at a two-year low.
Credit markets globally have rallied this year as investors increasingly expect central banks to be able to curb inflation without triggering a major economic slump, known as a “soft landing.” According to the latest Bank of America Corp. credit investor survey, 63% of respondents now expect that scenario and only 6% expect a hard landing.
“We think that weaker data is needed to drive a stronger consensus again on a ‘soft landing’ view, helping credit spreads resume a tightening trend,” strategists Barnaby Martin and Ioannis Angelakis wrote in the Feb. 12 note.
Recent economic data releases from eurozone nations and the UK is fueling hopes that central banks could soon start cutting interest rates following several years of hikes to tame inflation. European Central Bank Governing Council members are split on whether cuts could come as soon as March.
Read More: Credit Risk Scores Turning From Red to Amber Cue Soft Landing
Corporate credit spreads have also been tightening this year, with average euro-denominated, high-grade borrowing costs now at about 126 basis points and the lowest since February 2022, according to Bloomberg indexes.
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