Federated Hermes: Weekly Markets Wrap Up 22 October 2026

22 oktober 2026

In this week’s markets wrap up, Mitch Reznick explains why sovereign bond volatility is driving a repricing of credit risk, while Filippo Alloatti examines what next week’s UK Budget could mean for banks.

Mitch Reznick, Head of Cross Border Credit at Federated Hermes

Credit Spreads Are Decompressing

The volatility we are seeing in sovereign bond markets is no longer just a rates story. It is leading to changes in risk appetite and driving a genuine decompression in corporate credit spreads.

France is the clearest example. Against a backdrop of significant volatility in French government bonds, and the spread widening between French and German government bonds, investors are demanding greater compensation for taking credit risk.

The weaker borrowers are feeling the pressure first. Slower growth can make it harder for these businesses to grow into their capital structures, while a higher cost of capital means more cashflow must be directed towards servicing and refinancing debt.

This helps to explain why lower quality credit has been selling off faster than higher quality credit in recent weeks. In global credit, the basis between high yield and investment grade credit spreads is roughly 60 basis points greater since la rentrée (the post summer period in France) began.

We have also seen a meaningful sell-off in CCC credit in both the US and Europe, where credit spreads have widened nearly 300 basis points, underperforming the rest of global high yield by some measure.

But the picture looks different across credit markets. Risk aversion appears more acute in Europe. The spread between BB and B credit is nearly 240 basis points, around 50 basis points wider since the end of August, compared with around 135 basis points in the US, where it has widened by only around 15 basis points.

That divergence is creating opportunities. With spreads widening more sharply in Europe, we think selective European B credits are beginning to look relatively attractive again.

Filippo Alloatti, Head of Financials for Credit at Federated Hermes

UK Banks: Brace for Budget

The outlook for the UK could be worse as we head into next week’s UK Budget. Growth has been stronger than expected, households and corporates are generally doing okay, and unemployment has so far held up. The UK Chancellor also appears committed to staying the course on fiscal policy.

The bigger question for markets will be whether the UK Budget can maintain fiscal credibility against a backdrop of high gilt yields, while offering very little to improve the growth outlook.

For banks however, a larger tax hike is increasingly being priced in by the stock market. The bank tax surcharge currently stands at 3%, and UK banks already operate with a high overall tax burden.

Bank management teams have been keen to stress that further tax increases could have implications for investment and job creation. That said, a higher surcharge could have a smaller impact on predominantly domestic banks such as Lloyds and NatWest.

There may be some offset from potential changes to the treatment of intangible assets, which could add some 40 basis points to CET1. Meanwhile further Bank of England tightening should be positive for mortgage margins, although the flipside is greater competition for deposits. For now, despite some pockets of competition, there is no deposit war and liquidity remains stable.