The fourth quarter of 2021 was fairly weak, with wider spreads across the board. Weakness was driven by concerns around surging inflation, more hawkish central banks and the Omicron variant. While spreads on the Euro Investment Grade index were around 12 basis points (bps) wider over the quarter, November saw a particularly sizeable move, as spreads peaked at 110 bps (+22 bps on the month). These moves were unseen since Covid-19 as spreads stayed in a tight 80-95 bps range in 2021.
European financials continue to deliver a very strong performance. Third quarter results came ahead of expectations and continued to showcase the strength and resilience of the sector. Very benign credit conditions led to continued reversal in loan loss provisions made for Covid-19 and very low non-performing loans. Capital positions hover at all-time highs, providing extremely large buffers to protect bondholders. The Bank of England also released the results of its annual stress test, where all banks passed; despite one of the toughest scenarios designed since the start of stress testing. Most banks had no restrictions on paying AT1 coupons during the stress test horizon and none had their AT1s converted.