The world stands at an inflection point. Rising vaccination rates, bolstered by booster shots, have allowed most developed markets economies to reopen, with economic activity bouncing back as a result. Some countries are more advanced, such as the US, where the output gap is likely to be closing around now, while other areas, such as the Eurozone are still lagging behind their pre-Covid growth paths. This will have implications for future monetary policy, which is likely to start to diverge between Europe and the US.
As economic cycles mature and central banks start to withdraw monetary stimulus, market volatility tends to pick up – with the taper tantrum of 2013 an extreme, but recent, example. Given the slower recovery in the Eurozone, the European Central Bank (ECB) is likely to continue with a sizeable Asset Purchase Program for quite some time to come and rate hikes are unlikely before 2023 at the earliest. Ongoing monetary stimulus and ECB corporate bond purchases should thus continue to underpin the Euro credit market in 2022 as well.
Issuance of EUR impact bonds gathered significant pace in 2021 and we believe this is likely to continue into 2022. Recently, about 25% of all new issuance in the EUR investment grade market has been in impact bonds. In particular, sustainability-linked bonds are becoming increasingly popular and where we see the largest potential for growth in 2022.
The Responsible Horizons Euro Corporate Bond team, Insight Investment.
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