The conventional correlation between U.S. and European corporate bond markets, typically moving in tandem due to the significant interdependence of companies across these regions, seems to have faltered recently, according to an observation by Torsten Slok, Chief Economist at Apollo Global Management (NYSE:APO), on Monday.
The divergence is particularly noticeable in the spreads for CCC-rated securities, which are significantly tighter in the U.S. compared to Europe. This shift has emerged following a series of interest rate hikes initiated by the Federal Reserve, despite both regions grappling with inflation and potential economic downturns. The probability of a recession in the U.S. currently stands at 60%, compared to the Eurozone's 50%.
Slok underscored an inconsistency in the pricing of lower-rated corporate credit across the two regions, suggesting that it's not plausible for everything to be fine while simultaneously heading toward a recession.
He further theorized that a "yield-level mirage" might be occurring within the U.S., where investors may be focusing more on yield levels rather than the spread between them and benchmark government debt. This could potentially obscure underlying fundamental credit risks brought about by Federal Reserve rate hikes and persistently high capital costs.
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