Credit spreads have tightened in response to de-escalation efforts between Iran and the US. While credit fundamentals remain supportive, stretched valuations and lingering uncertainty suggest a more measured approach to risk-taking in the months ahead.
Risk premia have steadily compressed in recent months as the US attempts to draw a line under the conflict in the Middle East. The Memorandum of Understanding (MoU)1 signalled the final leg of the rally since the wides observed in March. The tightening was particularly evident in Europe, reflecting the region’s vulnerability to energy supply disruptions. Higher beta segments, especially high yield, led the tightening in spreads (Figure 1). Investment grade spreads, by contrast, remained stable.
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