The world is at a tipping point, with a US driving a trade war and pushing the limits of the Western alliance that has existed since the end of the Second World War. Screens are flashing red in almost every asset class — but IG corporate credit, now more than ever, is looking bulletproof.
Financial markets are mostly reacting as expected to the possibility of a US recession — and to expectations of higher borrowing to fund defence spending in Europe,
The S&P 500 fell by 4% on Monday, recording its worst day in more than two years. The 10 year Bund yield is 51bp higher than where it started 2025, with most of that rise coming in the past two weeks after Germany announced plans for hundreds of billions of euros of infrastructure and defence spending.
Meanwhile, the iTraxx Europe Main opened just 1bp wider on Monday compared with Friday’s close, and had made that up by Tuesday’s open.
Follow the money
European IG corporate credit has benefitted from a swell of cash inflows for the past 18 months, with this accelerating at the end of February to $5bn-equivalent in a week.
Since interest rates rose, corporate bonds have been offering a decent alternative to equities for the first time in more than a decade.
This year, the average coupon for a five year deal for a high grade corporate bonds in euros is 3.4%, according to GlobalCapital’s Primary Market Monitor, while spread volatility this year has been minimal at just 8bp, if iTraxx Europe Main closing prices are used as the barometer.
Contrast that with the S&P 500, for example, which offered a dividend yield of 1.297% as of last week. At the same time, the VIX implied volatility index is up by 65% in the past month to 27.26.
And now, as investors sell across a plethora of financial assets, corporate credit has had another two major struts to bolster its stability.
The first is short term and a positive for investors. The cross-currency basis swap market is at a level that means euros and dollars are at parity for bond issuers in terms of cost of funding, according to BNP Paribas.
This is a green flag for US borrowers with big funding programmes, as it means they can diversify their funding effectively into euros for free.
Even US borrowers with smaller funding needs will be watching the arbitrage carefully. If it falls another 5bp-10bp in favour of euros, it will be cheap enough to encourage them to come to the European market.
Investors have been starved of paper to buy, as evidenced by big book sizes in the primary market and deals landing close to or through fair value. More borrowers considering euros is a win for cash-rich buyers.
Fiscally helpful
The second support is longer term and far more beneficial to borrowers and spread levels. Increased fiscal spending from Germany is highly credit positive.
It leads to higher incomes and therefore savings for investments, which increases demand for bonds, particularly for assets that have performed well and are less volatile than other major asset classes. At the same time, it will probably lead to higher, or at least stable, central bank rates as the threat of increasing inflation returns.
Higher borrowing costs will make some issuers pause before entering the market — or maybe postpone deals indefinitely — lowering the supply of corporate paper.
This, combined with the excess cash in the asset class, means tighter spreads and a grand time for the borrowers that do head to market.
The party in euro investment grade corporate bonds is far from over, even if the world is around it looks like it already has a hangover.