European non-financials set to tank, Goldman says

European corporate bonds are set to underperform their US counterparts in the coming months, as a probable recession and tighter lending conditions drag on earnings, according to Goldman Sachs.

Investors should buy protection on the iTraxx Crossover index, Goldman says, predicting the index will widen to 850 basis points from around 747 basis points early on Wednesday.

European corporates remain highly leveraged compared with their US counterparts, with credit supply likely to tighten further as the pressure on bank balance sheets escalates under the weight of the sovereign crisis, Goldman says.  Austerity measures introduced to cut government debt will likely exacerbate the problem.

"We estimate that US non-financial corporate sector’s credit quality is close to its highest level in decades, while European firms have only reverted about two thirds back to pre-crisis
strength," says Goldman analyst Charles Himmelberg.