Prospects Q3 2025

Half a year of upheaval—yet risk premiums remain virtually unchanged. Is the calm in the credit market deceptive? Or does it reflect genuine resilience? Read on to learn where we see the positives and negatives in the current credit environment.

1. Review: The First Half of the Year as a Test Case for a New Market Environment

The sheer number of events in the first half of 2025 could easily have filled a decade: Germany’s abrupt shift in fiscal policy, including the reform of the debt brake; the U.S.’s so-called “Liberation Day” [sic] with far-reaching import tariffs; ongoing global conflicts; and the gradual erosion of once-stable alliances—all of these factors are having a lasting impact on the current market environment.

For investors, the key question is: Are we witnessing the beginning of a profound period of structural upheaval with an uncertain outcome—or is this merely short-term noise? A look at the bond markets so far suggests the latter—because despite significant volatility resulting from a variety of events, spread levels remained virtually unchanged in the first half of the year.

Spreadentwicklung der Kreditmärkte 2025

OAS on government bonds, Source: Bloomberg, EUR IG (LECFTREU), EUR HY (H23969EU), USD IG (LUAITRUU), USD HY
(LF98TRUU), EM IG (I04276US), EM HY (BEBGTRUU); Period: Dec. 31, 2024, through June 30, 2025

2. Business Conditions: Disciplined companies have built up financial buffers

Die Unternehmensbilanzen zeigen sich weiterhin in solider Verfassung. Ein Großteil der Emittenten weist  They are generating stable margins and robust free cash flows. At the same time, thanks to strict financial discipline, debt ratios remain low, and the companies have built up buffers to weather difficult times.

Corporate Debt – A Regional Overview

Source: Bloomberg; Net Debt / EBITDA (Field); Europe (MSCI Europe Equal Weight), U.S. (MSCI USA Equal Weight),
Emerging Markets (MSCI EM Equal Weight); Time Period: December 2014 – June 2025

3. Macroeconomic Environment: Structural uncertainty and political fragmentation are still being mitigated

The economic environment in the first half of 2025 was marked by ongoing uncertainty. Signs of a slowdown in global growth momentum are mounting—with the U.S. as the main driver. Leading indicators point to a slowdown in the robust growth seen in recent years: Purchasing Managers’ Indices (PMIs) have cooled, and the OECD’s leading indicators signal an economic slowdown in the U.S. At the same time, it should be noted that labor market data and other real economy indicators paint a robust picture. Given recent history—in which leading indicators predicted a recession that ultimately did not materialize—this divergence warrants special attention.

In contrast to the U.S., growth in Europe appears to be stabilizing despite setbacks caused by trade policies. The more expansionary fiscal policy emanating from Germany is likely to have a positive impact in the medium term. Emerging markets remain the global engine of growth in nominal terms, even though growth momentum varies significantly by region. The growth gap relative to the U.S. and Europe remains at an elevated level.

The monetary policy stances of the Fed and the ECB are very different: While the Federal Reserve remains in a wait-and-see mode in light of persistently high inflation figures, the ECB is already nearing the end of its cycle of interest rate cuts. The resulting yield spread between the euro and the U.S. dollar has led to higher FX hedging costs—particularly at the index level, where investing in U.S. dollar-denominated bonds has become less attractive as the additional costs significantly erode the achievable return. Furthermore, the ECB’s shift in monetary policy has already caused the yield curve in the eurozone to steepen noticeably. Investors are once again being rewarded for longer maturities, while the money market is becoming increasingly less attractive.

Geopolitical tensions remain a dominant risk factor. The U.S.’s protectionist trade policies—such as the expansion of import tariffs—are increasing uncertainty along global supply chains. The ongoing conflicts in Ukraine and the Middle East are amplifying the new underlying geopolitical noise.

On the commodities front, the picture is mixed: While oil prices are under pressure—not least due to OPEC+’s strategy, which prioritizes market share over price stability—copper is benefiting from the expansion of electric grids and renewable energy, as well as increased demand for electric vehicles. Commodities remain heavily influenced by industrial policy decisions—as exemplified by the recent U.S. announcements to impose import tariffs of up to 50%.

Despite this, the primary market in particular has remained remarkably stable. After a brief period of shock, issuance volume quickly rebounded—driven by strong investor demand, as reflected in high oversubscription rates and low issuance premiums. Strong underlying demand for corporate bonds remains a key pillar.

4. Evaluation: Lack of dispersion—selection is important

Assessing credit markets is challenging: risk premiums are near historic lows—with no discernible dispersion among issuers of varying credit quality. A traditional environment that fosters active credit management. 

While the persistently high total returns keep the credit sector fundamentally attractive despite tight spreads, the low risk premiums at the index level currently offer little protection. It is precisely in this environment that careful selection separates the wheat from the chaff: it allows investors to identify high-quality names with fair valuations—and to consistently avoid overvalued followers.

Risk Premiums – Percentiles (10 Years)

OAS on government bonds, Source: Bloomberg, HAGIM, EUR Investment Grade (LECFTREU), EUR High Yield (H23969EU), USD Emerging Market (H29190EU), BBB –
A (EUR) (own calculation), Sub-Senior (EUR) (own calculation), B–BB (EUR) (own calculation); Period: December 31, 2013, through June 30, 2025.

5. Outlook: Opportunities and Risks

Opportunities

• Geschäftsmodelle mit geringer Nachfrageelastizität und hoher Preissetzungsmacht
• Structural winners that benefit, among other things, from the energy transition
• Issuers with low credit ratings but < 1 >a solid balance sheet and limited refinancing needs

Risks

• Chemical Sector: Structural and Cyclical Challenges Continue to Weigh Heavily
• Companies with unhedged foreign exchange risks, particularly in emerging markets
• Defensive sectors with high debt and a rising interest burden

In an increasingly challenging and structurally changing market environment, we see specific opportunities primarily in business models with a non-cyclical nature. Sectors such as consumer staples, healthcare, and leisure services are characterized by stable cash flows, low demand elasticity, and strong pricing power—attributes that offer valuable resilience during volatile periods and contribute to the stability of portfolio returns.

In the commodities and cyclical industries segment, we selectively focus on structural winners of the transition. We find bonds issued by companies with robust balance sheets and a clear strategic focus on the energy transition particularly attractive—such as copper producers that stand to benefit from the expansion of electric infrastructure.

We also see attractive prospects for issuers in the infrastructure and regulatory sectors—particularly energy grid operators, which generate predictable cash flows through government-supported investment programs.

By contrast, we are cautious about companies that are facing a sharp increase in capital expenditures due to regulatory changes without receiving adequate compensation for the associated risk.

We place particular emphasis on refinancing capacity—especially in the high-yield segment. In this segment, we prefer issuers  with conservative debt ratios, a stable liquidity base, and reliable access to capital markets. In an environment of rising financing costs, the wheat is separated from the chaff.

We continue to view the chemical sector with skepticism, as it is suffering from weak fundamentals and unfavorable industry trends. Despite an increase in risk premiums in some cases, the challenges have not yet been fully reflected in the balance sheets and cash flows of many issuers.

In emerging markets, we avoid issuers with significant currency risk and no hedging. Our focus is clearly on companies from Central and Eastern Europe with euro-denominated bonds.

Finally, we remain vigilant even toward supposedly defensive sectors—particularly where high debt levels coincide with a persistently higher interest rate environment< 2 >. European telecommunications companies are a case in point: Despite stable business models, their capital structures harbor significant risks that are not fully reflected in adequate risk premiums across the board.