At first glance, the credit landscape today exudes stability:
Beneath the surface calm lies a thicket of uncertainties that markets appear too willing to ignore. Chief among them is the ongoing tariff war, an unresolved geopolitical fault line that continues to cast a long shadow. With questions still lingering on the legal viability of the tariffs and with still no resolution between the US and China, there is still significant uncertainty linked to trade wars, particularly with an administration that could unilaterally decide to change terms and conditions. This uncertainty is particularly consequential for inflation—a central concern for the Fed—which remains hostage to unpredictable tariff dynamics.
While the consensus still leans toward easing, Fed rhetoric is increasingly fragmented. Meanwhile, political interference—most notably President Trump’s pressure on a nominally independent Fed—has not gone unnoticed, injecting another layer of unpredictability into monetary policy outlooks.
Moreover, the much-lauded fiscal stimulus may be less potent than headlines suggest. In the U.S., a large share of the package simply extends existing tax cuts rather than injecting fresh capital into the economy. Corporates, already contending with high refinancing costs and policy uncertainty, are unlikely to ramp up capital expenditures under these conditions.
One of the most persistent misconceptions about credit markets is the assumption that they are uniform, homogeneous, and largely synchronized. Many investors tend to speak of “credit” as a single asset class, lumping together geographies, sectors, maturities, and even instruments. In truth, credit markets are anything but monolithic. They are complex, fragmented, and full of dispersion—offering a rich and varied landscape that rewards selectivity and careful calibration.
Regional diversification within high-yield markets presents a compelling opportunity for investors, as the Euro and US HY segments differ meaningfully across fundamentals, valuations, and technicals. Their divergence creates scope for active allocation between the two, enabling investors to extract incremental performance from the global high-yield universe. Both markets also provide substantial diversification and sectoral breadth: the US high-yield market is notably deeper and more heavily weighted towards energy, while the Euro counterpart offers greater representation in sectors such as autos. Moreover, regional segmentation can be influenced by macroeconomic conditions and flow dynamics, which can further act as a source of performance. Taken together, dynamic allocation between Euro and US high yield is not only a means of balancing risk but also a vital driver of added value in portfolio construction.
Fundamentals currently favour Europe. Rating drift has been more positive in Euro credit markets, with a greater number of upgrades than downgrades. The rising stars—issuers transitioning from HY to IG—outnumber fallen angels, the reverse transition. Furthermore, Euro HY has a higher proportion of BB-rated debt, versus the U.S., which is more skewed toward B and below. Leverage levels are generally lower in Europe, and free cash flow generation remains solid, painting a healthier credit picture overall.
Technical factors reinforce this view. Euro IG credit has attracted meaningful inflows, as investors begin reallocating from U.S. to European credit segments. Meanwhile, issuance in the Euro HY space has been relatively subdued, supporting market dynamics through reduced supply pressure.
However, at present, there is little justification for maintaining an overweight in Euro high yield relative to US high yield, with valuations standing as the decisive factor. While Euro HY offered comparatively strong value in early July, spreads had compressed markedly by late August, eroding much of the relative appeal. Today, the differential between the two markets is marginal, and with hedging costs having narrowed, the yield advantage once favouring Euro HY has also diminished. As a result, neither segment currently presents a compelling case for overweight positioning on a valuation basis.
Furthermore, regional differences are only one piece of the puzzle. Sector selection is critical. Different sectors exhibit varying sensitivities to macroeconomic trends, geopolitical shifts, and cyclical pressures.
Capital structure adds another layer of selectivity. Within a single issuer’s debt stack, subordinated debt and hybrid instruments have stood out in the current environment. These instruments often provide higher yields without proportionately higher credit risk, particularly when issued by high-quality corporates. For investors comfortable navigating structural complexity, such positions offer compelling risk-return profiles.
Bank subordinated debt in Europe currently presents an attractive investment opportunity, offering yields in excess of 5%[1]—a level of carry comparable to that of European high yield bonds in the BB segment. The asset class is underpinned by solid fundamentals, with banks demonstrating robust return on equity, strong capital buffers, and healthy interest coverage ratios. Moreover, issuance levels remain moderate and are being well absorbed by the market, reflecting sustained investor demand. As such, subordinated bank debt offers a compelling bridge between investment-grade and high-yield credit, combining quality with enhanced return potential.
In a world where central bank support is no longer omnipresent and credit conditions are increasingly dictated by idiosyncratic rather than systemic factors, investors must abandon blanket approaches to credit allocation. The “rising tide lifts all boats” phase is over; dispersion has returned, and with it, the need for skillful picking.
This new era of credit investing is less about making broad beta plays and more about navigating granularity—choosing between regions, sectors, maturities, ratings, and instruments with precision. Active managers with deep research capabilities are well-positioned to take advantage of the current environment by identifying mispricings and positioning portfolios to benefit from relative value across sub-asset classes.
Being selective is no longer optional; it is essential. Calibrating exposure thoughtfully—across geographies, sectors, maturities, and structures—offers the best path toward resilient and consistent credit returns. In this environment, differentiation isn’t just a feature of the market—it’s the strategy.
[1] Source: Candriam, Bloomberg, Data as of 27/08/2025, Bloomberg Contingent Capital EUR Index
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