Photo Leonardo Basile © Eurizon
By Leonardo Basile, Portfolio Manager at Eurizon
Despite the energy price shock and geopolitical risks, many bond issuers remain in good health
Over the past three months, two key forces have dominated financial markets: geopolitical tensions and the sharp rise in energy prices. The energy price shock is a supply shock that puts upward pressure on inflation and inflation expectations, while simultaneously weighing on economic growth. It is precisely this combination that makes the current environment particularly difficult for markets and central banks.
So far, the shock has not yet had a significant impact on the global real economy, partly because inventories have acted as a buffer. Corporate earnings, moreover, are holding up well overall. The latest earnings season proved solid, even though there are some disparities from one company to another. Against this backdrop, issuer fundamentals in the European high-yield bond market remain resilient for now, despite the considerable uncertainties surrounding the energy price shock.
In response to this situation, central banks are proceeding cautiously. The shock could yet prove short-lived if a political agreement were reached between the United States and Iran, but for now its dual effect — higher inflation expectations alongside weaker growth — leaves the European Central Bank and the US Federal Reserve needing to assess carefully how far it is actually feeding through to prices and activity.
In our view, however, it is unlikely that the ECB will repeat in 2026 an interest-rate hiking cycle as aggressive as the one seen in 2022. At that time, inflation in the euro area was already well above the ECB’s target even before the war in Ukraine began, and interest rates were still very low, or even negative. Today, policy rates in the euro area are at broadly neutral levels. We also believe the Fed has limited room to raise rates further, as US interest rates are already above neutral levels.
For the European high-yield bond market, this environment means above all one thing: absolute yield levels have become materially more attractive again. At the end of 2025, the average yield in the European high-yield market still stood at around 4.5%. The market yield now exceeds 5% — an appealing level from a historical perspective.
Admittedly, credit spreads have tightened again: they have fully reversed the widening seen in March and are once more close to the levels recorded before the recent geopolitical escalation. At the same time, in our view, several factors continue to support a constructive view of the market, including a likely gradual de-escalation in the Middle East and a progressive reopening of the Strait of Hormuz. In the short term, however, uncertainty is expected to remain elevated.
The key question remains whether global growth can withstand the current energy price shock. Our analysis remains positive, even if uncertainties are still considerable.
One of the main reasons for this is the investment cycle linked to artificial intelligence. In the United States in particular, AI is driving a substantial wave of investment. At the same time, AI could boost labour productivity and thus act as a positive supply shock, offsetting the negative supply shock caused by rising oil prices. In this context, global growth could prove resilient in 2026 despite the considerable uncertainties surrounding the energy shock.
In addition, fiscal policy remains an important supportive factor for economic growth. Significant public spending is planned in several countries, notably the United States, Germany and Japan, helping to underpin growth.
In the European high-yield bond market, we currently favour the banking sector. European banks are historically well positioned in terms of capitalisation and profitability. In our view, subordinated bank bonds, especially AT1 and Tier 2 securities, continue to offer attractive yields relative to the credit quality of issuers up to the first call date. Although these instruments carry somewhat greater spread sensitivity, the issuers themselves benefit from investment-grade ratings.
Within the portfolio, we generally favour an attractive carry profile alongside selective security selection. In the single-B segment especially, choosing individual issuers is a key driver of performance. For strategies focused on short maturities, we also ensure that duration remains limited, so as to manage exposure to interest-rate fluctuations without taking on undue risk. Diversification remains essential — though a portfolio should not be too fragmented, so that individual positions can continue to be analysed and monitored effectively.
Overall, we remain constructive on European high-yield bonds. In our view, the market continues to offer opportunities for active investors, supported by higher absolute yield levels, issuer fundamentals that have remained solid so far — even if conditions vary from one issuer to another — favourable market technicals and contained default rates. At the same time, the environment remains marked by uncertainty, volatility and geopolitical risks. As a result, active selection of securities and individual issuers continues to grow in importance.
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