From disinflation to reflation to stagflation?

March’s credit market performance was driven more by interest rates than by widening spreads, with sterling credit, US high yield, and investment grade all hurt mainly by the move in yields.

European and some emerging market credit were weaker for a different reason, as spread widening suggested investors were pricing in more macro stress and a possible stagflation backdrop.

That risk matters because Europe and the UK are more exposed to higher energy costs, which could pressure consumers, corporates, and refinancing conditions if oil stays elevated.

Even so, spreads remain relatively contained near tight historical levels, helped by solid corporate fundamentals, less leverage than before the global financial crisis, and a healthier banking system.

For investors now, the key question is whether this is only a temporary geopolitical shock or the start of a longer period of slower growth and higher inflation that would be less friendly to credit.