Taps Coogan – December 20th, 2023

The following chart, from the FT via Michael Arouet, highlights the divergence between US and EU junk bond yield spreads.

Probably nothing pic.twitter.com/ITCra04Gzh

— Michael A. Arouet (@MichaelAArouet) December 20, 2023

The premium over the ‘risk-free’ rate that investors are demanding to hold EU junk bonds has risen to a startling 18%, the highest since the first European Sovereign Debt Crisis, and reflective of acute fears that the EU will slip into another broad recession. Meanwhile, recession fears in the US remain more muted and the space for a monetary policy easing significantly larger.

These developments are reflective of the growing divergence between the US and European economies, with the later seeing very modest real growth since the Global Financial Crisis and repeated mild recessions.

While the spreads above will presumably re-converge at some point – cyclical in nature as they are, the underlying economic divergence likely will not. The EU’s demographic and economic headwinds have become ever more intractable and the political will to make pro-growth reforms is almost entirely non-existent.