Credit Risk for Europe Bonds Soars in Longest Streak Since 2015

(Bloomberg) -- European credit markets were rocked by the European Central Bank's pivot toward tightening and an increase in the Bank of England's main rate, putting indexes of risk on course for their longest streak of weekly gains in almost seven years.

The cost of insuring junk-rated bonds climbed 29 basis points this week as of 4:59 p.m. in London, the most since November, while a similar measure for investment-grade debt rose six basis points, according to Markit gauges. The indexes were on course for their sixth week of gains, the longest run since June 2015.

The rise in credit default swaps is a sign that investors are nervous about just how aggressive central banks will be with their tightening cycles. An unexpectedly strong reading of U.S. nonfarm payrolls on Friday is adding more pressure on the Federal Reserve to raise interest rates, and traders are betting the ECB's seven years of negative interest rates will end this year. Meanwhile, the BOE has delivered back-to-back rate hikes.

While the increase in default swaps accelerated this week, they were already on the rise as issuers -- especially high-yield borrowers -- were met by investors who demanded higher coupons. January saw a roughly 50% slump in sales of non-investment grade bonds in Europe as investors prepared for the prospect of rising interest rates.

The average yield on junk bonds was 3.4% on Thursday, while that of high-grade climbed to 0.92%, according to Bloomberg indexes. They're both at the highest level since 2020.

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