Chart of the week: Credit Spread Trends

Data-driven insights and analysis from our investment team every week.

Historically European corporate bond spreads (the extra yield premium over government yields) have been higher than US corporate bond spreads. This is reflective of higher perceived risks with European corporates relative to the US. Drivers of this in recent history have been the proximity to the Ukraine and Russia conflicts and the European banking crisis of 2023, among other things. This thematic of higher available corporate bond spreads has driven overweight allocations to European corporate bonds relative to US corporate bonds within the corporate bond funds held in our model portfolios, aiding positive marginal gains. However, European spreads have tightened significantly relative to the US year to date. The differential between European corporate spreads and US corporate spreads has fallen to around 0.05%, marking a significant drop from a 0.25% 5-year average at the start of this year. One driver of this has been the significant divergence of central bank actions this year. As the European Central Bank (ECB) cut rates the yield on offer from cash bonds and cash instruments has fallen, pushing investors into other investment opportunities such as corporate bonds. Looking forward to next year, the potential fall in US rates driven by cuts from the US Federal Reserve has the potential to spark a similar phenomenon in the regions’ investment landscape. This is a theme which we see influencing corporate bond manager investment allocations going forward.