European Fixed-Income Outlook: Euro Markets Will Stand Out in 2022

Rising inflation is troubling bond investors worldwide, but European bond markets will likely experience comparatively weaker inflation pressures and stronger central bank support. Even so, investors in euro markets will need to stay alert and active as 2022 unfolds.

Global economic dislocations and inflation pressures are set to continue into 2022, making for tighter monetary conditions. In the US, where prices have risen at the fastest rate since the 1990s, the US Federal Reserve is accelerating tapering its bond-buying program and will likely begin hiking rates in March and will continue through 2023.

In contrast, euro-area inflation should remain more subdued than the US, with no rate hikes likely by the ECB before 2023. This would leave euro-area bond markets in 2022 with ultra-low rates but probably also low volatility. We expect a mostly supportive background for investors in euro fixed income, with some notable opportunities but also some potential threats.

Europe Leads in Sustainable Investing

Responsible investing continues to grow in importance. In 2022, we will likely see even greater investor interest in environmental, social and governance (ESG) factors and a further increase in issuance of green and other sustainability-linked bonds.

Europe has been and remains the global leader in this area (Display, below), in terms of both innovation and volume. In fact, 44% of new issuance in Europe for November 2021 was in ESG structures. We expect this dynamism will attract more capital into European fixed-income markets in 2022. That in turn will likely compress spreads in the European ESG-linked bond markets.