Are there still opportunities in euro credit despite market uncertainty?

Income still reigns supreme despite an uncertain macro backdrop

At the start of the year, our expectation was that fixed income markets’ performance would be income driven. Even with the recent volatility and ongoing uncertainty, we still hold to this expectation. In part, this is because, for investors, absolute yields are still above the levels seen for much of the last decade.

However, we do not expect any substantial tightening on spreads. Although we have seen a significant shift in sentiment over the past few weeks boosting risky assets, uncertainties remain high. Euro investment-grade credit spreads tightened by 10bps to 87bps by the end of May, fully retracing the widening observed post-Liberation Day¹ .  However, spreads remain 11bps wider than the mid-February lows of 76bps, indicating that the recovery is not yet complete¹. This is understandable: Risk assets fear uncertainty, as was seen by the spread widening in April following the US tariff announcement. 

So even though they have since moved closer to levels seen before the so-called Liberation Day, without any breakthrough in talks with China or the European Union, it is hard to see further significant tightening from here. 

Companies remain resilient

Many companies have entered this period of instability with strong balance sheets and overall positive fundamentals. First quarter earnings, while mixed, did offer some bright glimmers of hope: Banks were supported by solid investment banking results, contained risk provisioning, and better non-net interest income, while globally, profitability and asset quality remain robust. Defensive sectors, such as utilities and telecoms, also continued to report decent first-quarter earnings.

However, the picture is more mixed elsewhere, particularly for the automotive industry, which continues to face a challenging outlook, mounting pressure in China, and potential negative impacts from tariffs on profitability.  Additionally, there have been some disappointing figures in the consumer sector, with companies like Kering, LVMH, and Carlsberg underperforming.

We maintain a constructive view on financials, although current valuations limit the scope for significant outperformance versus corporates. We also continue to favour corporate hybrids, particularly those with call dates under five years, which offer an attractive risk-return profile.

Overall, we believe that the credit quality of European issuers is in good shape, enabling them to withstand a potential economic slowdown.

Technical factors could be a performance driver

Unsurprisingly, in April supply was limited given such a volatile environment, totaling €45 billion, largely dominated by corporates² . US issuers accounted for 38% of total issuance for the month². The lower level of issuance provided a supportive technical tailwind for spreads, particularly for financials.

May saw a complete turnaround as supply surged, with nearly €107bn in new issuance—a record monthly figure for the euro market—despite multiple bank holidays³ . Another driver, although to a lesser extent than previously, were US issuers who continued to tap into the euro market.

Technical were also boosted by the demand side, with books oversubscribed by an average of 3.5x³.

So overall, despite the macro risks, technicals remain robust, supporting resilient credit markets even amid heavy issuance.

Different ways to access the market

The combination of macro uncertainty, carry-driven investment and resilient fundamentals sets a strong case for why euro credit should continue to be an area of interest for investors.

But to make the most of it, it's crucial to choose a suitable approach. In particular, we see opportunities in three different approaches:

Short-duration credit

Investment grade and high yield remains a sweet spot in this uncertain world. Short duration, with typically less exposure to interest rate risk, offers investors potential regular income without the volatility being experienced further out the curve.

Flexible

An active and flexible management approach, which is free of any benchmark, we believe should help to provide attractive risk-adjusted returns in different markets. This is because such strategies can move across asset allocations and manage duration with agility, thus potentially creating value

While spreads remain wider than February lows, we are cautious about the potential for further tightening. Valuations are less attractive, and we expect a rangebound pattern in the near term, with limited catalysts for significant moves in either direction. Potential catalysts in the coming months includes: Hard economic data releases, rate volatility, and Q2 earnings season.

That is why for euro credit, we believe short duration or a flexible approach may offer investors different options to weather some of the storms brewing in a world of uncertainty.