Steffen Ullmann
Senior Portfolio Manager – Investment Grade
The EUR credit market has recovered significantly since the beginning of the year. Spreads have fallen from 95 basis points to 79 basis points in the meantime – even geopolitical uncertainties and structural fiscal changes in Germany have not slowed this trend. At the same time, the spread to USD credit markets has narrowed to a historically low level. But is this a sign of strength – or a warning signal?
EUR Credit remains unimpressed by recent developments
The EUR credit market has proved resilient in the year to date. Spreads have narrowed from 95 basis points to 79 basis points in the meantime – despite macroeconomic uncertainties and growing trade risks. The reaction to the latest fiscal policy developments in Germany is particularly noteworthy: the strongest one-day yield movement on German government bonds since 1990, triggered by the The announcement of a reform of the debt brake and an additional, debt-financed infrastructure program left the EUR credit market completely unimpressed.
Instead of a risk adjustment, spreads in the EUR credit market continued to narrow, while the opposite trend was seen in the USD credit market. Spreads widened there, causing the spread difference for 5-7-year maturities to shrink to just 13 basis points – a level that has not been reached for a long time, apart from the market turmoil during the COVID crisis.
These contrasting movements raise the question of whether this is a structural revaluation or whether the latest development is a warning signal for the EUR credit market
Source: Bloomberg, Euro-Aggregate: Corporate – 5-7 Year (H02136EU Index) and US Corporate 5-7 years (I13282 Index), own calculation; time period: 31.12.2009 to 21.03.2025.
Political uncertainty in the USA as a driver of spread widening
The reduced spread difference is primarily due to the fact that USD spreads have widened as a result of extreme political uncertainty regarding the new US administration. Growing concerns about protectionist measures, regulatory intervention and their negative impact on US growth have weighed on investor confidence and led to a reassessment of credit risks in the US.
While the EUR credit market continued to narrow in an environment driven by technical demand, the widening of USD spreads reflects increasing uncertainty about the direction of US economic policy. These uncertainties could also spread to the global credit market and affect the EUR credit market in the medium term.
This is particularly relevant as 28% of issuers in the EUR Credit market come from the US and are therefore primarily dependent on the US economy. In addition, many European companies generate a large proportion of their sales outside Europe, as the EU is an export region without a strong domestic market. If US growth comes under further pressure, this could affect not only US issuers, but also export-oriented European companies – with corresponding consequences for the EUR Credit market
Spreads, stimulus and structural problems: Where is the EUR credit market heading?
While fiscal stimulus in the form of new debt programs could provide positive growth impetus in Europe in the medium term, the US and global economy remains the decisive factor for the earnings performance of most companies in the short term.
In addition, the key question remains as to what measures Europe will take to strengthen its long-term growth potential through structural reforms. Fiscal stimuli and debt-financed programs may provide short-term growth, but they do not solve structural problems. Deregulation, the strengthening of the domestic market and more competitive location conditions are decisive levers for sustainable growth, but hardly play a role in the current economic policy debate. Without far-reaching reforms, the fiscal stimulus will only provide temporary support, while Europe’s structural weaknesses will persist in the long term.
In the short term, the US and global economy remains the dominant factor for the earnings performance of many companies. Although European companies with a domestic focus could benefit from fiscal stimulus in the medium term, there are clear consequences for the market as a whole as a result of current developments:
• The small spread difference makes the EUR credit market less attractive for spread attractive.
• The narrow spread difference could make a rotation into into USD credit markets more interesting again. again.
• Global growth momentum remains the decisive factor for the risk assessment of credit markets.
Should growth in the USA slow and protectionist tendencies increase, these effects could intensify and also weigh on the EUR Credit market.
EUR Credit remains vulnerable to global developments
The strong start to the year in the EUR credit market reflects a combination of stable fundamentals and technical demand. However, the convergence of the spread difference with the USD credit market is less a strength than a warning signal.
The resilience of the EUR Credit market in recent years is no coincidence, but a structural characteristic. The market is now more closely linked to the global economy than to the European domestic economy.
28 percent of issuers come from the USA, and many European companies generate the majority of their sales outside Europe. As a result, the market has been less affected by European economic downturns in recent years and has shown impressive stability.
This fundamental market structure will not change overnight. In the short term, the development of the global economy and the US economy will remain decisive. At the same time, it remains to be seen to what extent medium-term fiscal stimuli in Europe can provide sustainable growth impetus.
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Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either.
Past performance is not an indication of future results, nor can future performance be guaranteed.
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