Wider Spreads, Solid Credits: A Market for Bond-Pickers
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European high-yield spreads have widened to near their highest levels in 12 months. This is a repricing of risk, not a broad-based deterioration in credit quality. The uneven adjustment creates opportunities for selective investors.
Spreads are near the year’s widest
Since mid-September the index has widened by 66bp.
After a spike to about 320bp in March, spreads retraced the whole move to a low of 230bp in July. Then the rally reversed: since mid-September the index has widened by 66bp, to 321bp, just off its 339bp peak of 26 October and nearly 60bp above its one-year average.
Three things drove it: higher rate volatility and real yields, doubts over how the AI build-out will be funded, and firmer energy prices. Weak fund flows against heavy net supply made it worse.
Beneath the index, dispersion is the story
Headline numbers hide a very uneven market.
AT1s normally track Euro HY closely, as they did in March. This time, they moved far less (+5bp vs. +50bp over 12 months), and the gap between AT1 and Euro HY spreads has widened to 52bp, three times its average of 17bp over the past year.
Funding needs have made hyperscalers’ bonds the soft spot of credit: EUR IG hyperscalers’ spreads are 50% wider this year vs. 16% for the rest of the market. In US HY, AI-related spreads widened 50bp in the week to 16 October, vs. 2bp for everything else.
Euro IG telecoms widened more than any sector except autos over the past month. Dispersion within TMT is wide: IG incumbents remain resilient, with free cash flow set to improve as fibre roll-outs near completion, while in HY high leverage and thin margins leave little room for error. The SpaceX spectrum deal also revived the threat to US telcos.
The OAT–Bund spread has widened to around 165bp from 70bp at the start of the year, back to eurozone-crisis levels, on the deficit, energy prices and the 2027 election. Corporates have underperformed their peers, but comparatively less: about 50% of French high-grade corporate bonds (€215bn) now yield less than the OAT, vs. circa 15% one year ago.
Fundamentals have not weakened
Corporates and banks alike are showing solid fundamentals.
Data shows companies and banks are in better shape than in recent years. Leverage is lower, margins are at the top of their post-2008 range. Banks hold more capital and record higher earnings. What has changed is the price investors demand, not the quality of what they own.
The key metric we watch closely is the interest burden. Refinancing has pushed maturities out, but at a higher cost, so we assess each issuer after its refinancing, not before.
What has changed is the price investors demand, not the quality of what they own.
Our stance: be selective, name by name
Dispersion at this level rewards bottom-up work.
When the index widens by 50bp and financials by 5bp, owning the market is a blunt tool. Dispersion of this size rewards bottom-up work twice: by avoiding the credits that reprice, and by buying sound ones that widened only in sympathy with their sector or country.
The sell-off is creating that second opportunity. For example, some good issuers across sectors now trade at levels that, in our view, overstate their risk.
We have no crystal ball on market timing, and risk drivers are present. But opportunities are emerging selectively. A cautious portfolio positioning, adding risk selectively, remains the best strategy in such market conditions.
Past performance is not a reliable indicator of future results.
Past performance is not a reliable indicator of future results.
Two recent positions
Strata · In practice.
Funding Lone Star’s €3.4bn purchase of ContiTech, the new €400m 7NC3 secured notes priced at 7.75%, above every direct similarly rated peer we compared, then fell about 3 points after opening. We added to our position. ContiTech is a global leader in engineered rubber: about 70% aftermarket sales, 3.6x net secured leverage and €1.37bn of sponsor equity below the notes with €161m of expected savings in the EBITDA.
A core holding in our portfolio. The €2.5bn acquisition from Sanofi brings in a listed shareholder with 26%, takes over manufacturing sites after supply problems, and sets a fresh 10x valuation. Net leverage is 3.87x, yet the 6.75% 2032s trade at z+330, against z+210–220 for peers at 5.2–5.3x. An upgrade to B+ would, in our view, justify z+220. Risks: portfolio execution, and Sanofi payments (€202m preferred dividend, up to €93m earn-out a year) from 2028.
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