Monetary policies, a support for the high yield market
The high-yield market has been trading at historically low spread levels since the beginning of 2024.
The end of the monetary cycle has been a relief for companies whose leverage ratios (net debt to EBITDA) typically hover between 3 to 6 times. Successive monetary easing measures have indeed brought the European Central Bank's deposit rate down from 4% to 2%. These rate cuts have likely mitigated the impact of the tariff chaos orchestrated by Donald Trump and facilitated a resurgence of growth in the Eurozone. Despite a sharp drawdown surrounding the announcements in April, BB spreads have fallen below the 200 basis points threshold.
It is possible that the monetary support measures implemented in the wake of the COVID crisis have insulated borrowers from subsequent tightening by deferring refinancing deadlines. This has contributed to a form of attrition in the primary market, with the scarcity of paper driving spreads tighter.
The primary market has seen renewed activity at the end of the first half of 2025. Valuations will need to adjust to this new environment, although the persistently accommodative stance of the ECB provides a degree of visibility into 2026. A relative tension is already observable in the spreads of lower-rated issuers, yet our top-down estimate of the default rate remains below 4% over the next 12 months.
High Yield issuers: supportive fundamentals
The second quarter earnings season is coming to an end, revealing a resilience in fundamentals. Despite sometimes mixed operational performances, European companies continue to maintain a strong liquidity position and satisfactory levels of debt. Credit rating downgrades have remained specific to a few issuers in sectors with negative outlooks.
Since the beginning of the year, many groups have continued to extend their debt maturity profiles, reflecting the robustness of their financial profiles. Refinancing conditions have remained favourable. The number of debt restructurings below par has been limited to a few issuers that have been well-known for many years. The default rate in the High Yield market is expected to remain very low in 2026, still below historical levels.
However, the outlook for 2025 is cautious. The announcement of the impending implementation of 15% U.S. tariffs on European products, combined with geopolitical uncertainties and a slowdown in demand from China, has led to downward revisions of previous 2025 guidance, particularly impacting the European automotive and chemical sectors.
Within the High Yield investment landscape, there are subordinated issuances from telecommunications groups, utility services, and regional companies primarily active in Europe. The direct impact of the new U.S. tariffs on the operational results of these issuers is expected to be more limited, providing some visibility in this uncertain environment.
Technical factors still highly favourable
The recent dynamics of the credit market are largely driven by the monetary cycle. The decrease in ECB deposit rate from 4% to 2% led to a significant decline in money market yields, driving investors to seek alternatives that still offer an attractive carry level. In this context, European High Yield fully benefits from the "TINA" (There Is No Alternative) rationale.
Moreover, strong technical factors are contributing to the resilience of spreads. Inflows into the asset class have indeed been massive, mechanically supporting valuations. This support has been further reinforced by several years of low net issuance volumes: even though the primary market has become more active in 2025, supply remains insufficient to meet abundant demand.
The structure of the market is also an edge. European High Yield is indeed dominated by BB-rated issuers, which historically have low default rates. Additionally, a relatively low duration limits sensitivity to interest rate movements, providing the market with added stability.
Finally, recent experience has shown that geopolitical shocks, while they may trigger periods of risk aversion, often result in temporary corrections. The example of trade tensions, initiated by Donald Trump, illustrates the market's ability to absorb such shocks.
Thus, the current equilibrium provides a strong foundation to explain why spreads remain particularly resilient, even in a context of exogenous shocks.
