Iran war aftershocks rewrite credit bond map: Deutsche Bank reduces holdings of Euro credit bonds, shifts to US dollar corporate bonds as safe haven.

Credit market strategists from the European financial giant Deutsche Bank AG recently stated that European corporate bonds are vulnerable to negative impacts from the aftermath of the Iran conflict, and they expect spreads for investment grade and junk bonds to widen further by the end of the year. According to Deutsche Bank, the fundamentals of European credit bonds are more exposed to "energy and trade cost shocks", while U.S. credit bonds are more influenced by "AI investment cycles and technology cash flow support". Persistent widespread inflation, rising transportation costs, chip shortages, and ongoing tariff policy uncertainties are all unfavorable factors, especially in Europe. Led by Steve Caprio, the credit strategist team currently emphasizes in their global allocation to "reduce" exposure to the euro-denominated credit bond market compared to USD credit bonds. They wrote in a report sent to clients on Monday that while the "artificial intelligence disruption theme" led by developer Claude Anthropic is a significant risk for the U.S. credit bond market, the "aftermath of the Iran conflict is becoming more apparent." They wrote in the research report, "Persistent inflation in Europe, rising shipping costs, potential impact on key cyclicals and the general tech sector due to chip shortages, along with ongoing uncertainty in tariff policies, are headwinds, especially in the European credit bond market." "At least until the end of the year, the outlook implies a greater degree of differentiation and a certain degree of spread widening in the bond market." The strategists stated that for euro-denominated high-grade bonds, spreads are expected to widen by nearly 20 basis points to 95 basis points by the end of the year. They wrote that junk bonds in the region are expected to widen by 77 basis points to 345 basis points. The strategists added that European manufacturers were able to weather the storm of surging energy prices during the 2022 Russia-Ukraine conflict due to the rebound in labor markets post-pandemic and the rare loose monetary policy adopted by the European Central Bank, but "both of these are no longer in place" and inflation continues to remain high. For USD investment grade bonds, they expect a more moderate widening of spreads by 10 basis points to 82 basis points by the end of the year. Junk bonds are expected to widen by 39 basis points. The strategists wrote, "In the U.S., our concerns are not as acute, but more structural. The U.S. is a mix of AI tailwinds and headwinds, and currently, all AI-related tailwinds are stronger than our expectations." The strategists wrote that in the sub-investment grade sector in Europe, single B-rated companies are facing a "far higher level of bond and loan maturities pressure than historical averages" in the next two to three years; if total financing costs rise by half a basis point, 44% of companies will significantly shift to negative free cash flow. The aftermath of the Iran conflict may have a major impact on European credit bonds Leaders from the U.S. and Iran announced on Monday that they had reached a temporary ceasefire agreement to reopen the Strait of Hormuz, with U.S. and Iranian government officials scheduled to meet in Switzerland on Friday to formally sign the agreement. This significant agreement between the U.S. and Iran will undoubtedly alleviate major risks and continued upward pressure on prices in the energy supply sector, but it will take longer to rebuild confidence for shipowners, insurance companies, and refiners. While the anticipated reopening of the Strait of Hormuz has already reduced the war premium on oil prices, the expected resumption of operations will take several months, and financial market expectations of "resuming takes time, inflation pressures ease but do not disappear" continue to stir stock markets, cryptocurrency pricing, and other risky assets, especially as trade and transportation chains, insurance chains, and investor trust chains will not be repaired synchronously with the temporary ceasefire agreement between the U.S. and Iran. Some senior analysts also noted that many buyers have adjusted to this supply disruption by locking in North American energy as alternative supplies and diversifying energy transport routes, and in the current context where nuclear issues remain unresolved, they are still cautious about the energy trade through the Hormuz Strait, all of which implies that Middle Eastern oil and liquefied natural gas trade will not simply return to pre-war conditions. The European manufacturing, chemical, automotive, aerospace, industrial, and consumer chains are more sensitive to imported energy, maritime logistics, and external demand; once oil and gas prices, maritime insurance, freight, and inventory costs remain high, corporate profit margins will be squeezed, the ability to cover interest with cash flow will decrease, and spreads for investment-grade bonds and high-yield bonds will naturally widen more easily. ECB official Nigel previously warned that even if the Hormuz Strait reopens quickly, it may take months for oil supply to return to pre-war levels, and inflation cooling will not happen immediately. The so-called "aftermath/aftershocks of the Iran conflict" do not refer to the conflict itself escalating, but to the second-order negative impacts that the war has left and will continue to transmit: high oil and gas prices, slow recovery of insurance and shipping trust in the Strait of Hormuz, resulting in high insurance premiums and transport costs, supply chain detours, companies restocking, chip shortages impacting cyclical industries, ongoing tariff uncertainties, and central banks unable to ease quickly due to sticky inflation. Oil prices fell after the preliminary agreement between the U.S. and Iran, but the maritime insurance industry remains cautious about crossing the Hormuz Strait, with a full recovery to pre-war traffic levels expected to take several weeks, and over 100 oil tankers still waiting in the Gulf for clearer safety signals. In the view of the Deutsche Bank analyst team, U.S. credit bonds also face AI disruption risks, but AI capital expenditures, cloud computing, strong semiconductor demand, and the accelerated construction of data centers along with the stronger cash flow of large tech companies are providing a stronger credit buffer; while European credit bonds are faced with faster cost shocks, weaker profit elasticity, and urgent refinancing pressure. Deutsche Bank stated that before the Hormuz reopens but energy trade is not fully normalized, the credit markets should pay more attention to regional differences, cost transmission capabilities, refinancing term structures, and AI cash flow moats, rather than simply chasing high spreads/high yields.