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Credit Insights

Weaker Economic Expectations in Europe Pressure Corporate Bond Market

Following the brief sell-off at the end of last year, investors have had a steady appetite for risk assets thus far this year. As an indication of investors' comfort in taking on greater risk in order to reach for yield, long-beleaguered Greece returned to the public bond markets in the middle of last week and was able to issue EUR 2.5 billion of 10-year bonds at a yield of 3.90%. The demand for the new issue was almost 5 times oversubscribed, with reportedly EUR 11.8 billion worth of orders for the new notes. This was the first 10-year bond offering priced by Greece since before the 2011-12 Greek debt crisis. After years of working to improve its creditworthiness, Greece has been making a comeback in the public capital markets; earlier this year, it successfully priced EUR 2.5 billion of 5-year notes at 3.60%.

However, after steadily rallying for much of the year to date, many risk asset markets pulled back last week. Part of the reason for the pullback was dour news out of Europe. Following the European Central Bank's meeting Thursday, the governing council announced that it kept its key interest rates unchanged and expects that those rates will remain at current levels through at least end of this year. The reason for the continued easy monetary policy of negative interest rates for the foreseeable future was that the ECB lowered its forecast for 2019 GDP to 1.1% from 1.7%. In addition, the ECB lowered its GDP forecast for 2020 to 1.5% from 1.6% and held its forecast steady for 2021 at 1.5%. To bolster the economy during this softening patch, the ECB also announced that it will restart its targeted longer-term refinancing operations in order to increase liquidity in the European Union. On the basis of the lower growth estimates, the ECB reduced its inflation forecasts. It now forecasts inflation of only 1.2% in 2019 compared with its prior forecast of 1.6%. The ECB lowered its 2020 and 2021 inflation forecasts to 1.5% and 1.6% from its prior expectations of 1.7% and 1.8%, respectively.