Credit markets have continued to perform strongly in 2025. Spreads rebounded swiftly from the weakness seen around ‘Liberation Day’ and have tightened steadily since the spring.

Looking ahead to 2026, a key question is whether US growth can remain resilient in the face of weakening underlying trends—most notably slower job creation—while the euro area appears set for a clearer upswing. Euro area Gross Domestic Product (GDP) growth is expected to accelerate into late 2026, reaching 1.4% year-on-year by Q4,* supported by fiscal stimulus and stronger domestic demand.

* Data as of 31st December 2025

Fundamentals Remain a Pillar of Strength

Corporate fundamentals remain broadly supportive. In 2025, issuers have experienced positive credit migration, stronger balance sheet metrics, and higher interest coverage, signalling reduced vulnerability relative to prior cycles. Indeed, a greater number of companies have seen their credit quality improve rather than deteriorate. These trends underpin ongoing issuance and provide resilience against macroeconomic volatility. Notably, leverage among European high-yield issuers has been trending lower since Q4 2022 and now sits at the bottom of the current economic cycle.

Leverage evolution for European High-yield issuers

With global GDP expected to grow, banks well-capitalised, corporates generally healthy, and households relatively resilient, we believe the current cycle is likely to extend. Although spreads on European high-yield bonds are approaching the lowest levels of the past five years, they may still tighten further, supported by the lower indebtedness of the underlying borrowers.

Spread per turn of leverage in European High-yield

Spread compression appears less pronounced when adjusted for credit quality. When adjusted for leverage, valuations show a much shallower decline, particularly since the start of the earnings season in October. This suggests that spreads can tighten further before reaching the levels seen at the beginning of 2025.

Opportunities and Risks in the Year Ahead

While volatility may rise relative to 2025, our outlook for credit remains constructive heading into 2026. That said, the market is not without risk. While higher-quality segments have performed well, weaker credits continue to face pressure from a combination of issuer-specific and sector-wide challenges. The chemicals sector illustrates this divergence, with many issuers struggling amid excess supply from China and subdued demand from key end markets such as autos and housing.

This environment heightens the importance of active credit selection. Focusing on issuers with strong interest coverage, conservative balance sheets, and resilient cash flows should help improve risk-adjusted outcomes. We continue to see higher quality corporate and Collateralised Loan Obligation (CLOs) as offering some of the best potential risk-adjusted returns, but we prefer to be positioned further up the ratings curve and in higher quality issuers. We expect performance to be driven by elevated carry and yields in the context of strong technical drivers.

Despite tight spreads, overall yields remain healthy