European high-yield debt has continued to deliver positive returns in the third quarter of 2025. There has been strong demand for this fixed income asset class in the context of solid company earnings, writes Olivier Monnnoyeur.
Credit spreads tightened by 35 to 40 basis points to 240bp and the total return (on the basis of the BB-B index ex-financials) was 2.08% in the quarter for a year-to-date return of 5%1.
A bumper year for issuance?
Continued strong demand for European high-yield (HY) bonds facilitated an active primary market with €37 billion of new bonds issued over the quarter and September seeing a record level of €20 billion. That takes year-to-date issuance to €107 billion.
It now looks likely that issuance will surpass the full year 2024 total of €120bn (the previous record was €150bn in 2021). Reflecting investors’ preference for quality, ‘BB’ rated debt has dominated primary market activity – accounting for 56%. That exceeds last year’s 51%.
That preference was also observed in the spread dynamic between ‘B’ rated and ‘BB’ rated bonds, ‘BB’ having significantly outperformed ‘B’ in recent months. Exhibit 1 shows the widening gap in spreads of the two ratings cohorts. We note that in the US market, the trend has been in the other direction with ‘B’ outperforming ‘BB.’
Investors prefer quality
We believe this spread decompression in European high-yield corporate bonds reflects a cautious positioning by high-yield investors given the considerable concerns over an economic slowdown. Cyclical sectors such as chemicals, industrials, and construction have been underperforming as the preference for quality and resiliency dominates.
We are seeing a defensive market rally with situations that are more difficult to analyse being overlooked or sold by investors. While tepid fundamentals may justify some of these trades, we have been spending more time on analysing credit stories where we see merit and potential for through-the-cycle improvements in company balance sheets.
This setup presents an opportunity, and we are applying our credit analysis skills and non-consensual approach to pick names whose bonds we believe are trading with an unjustified elevated premium.
A positive outlook for European high-yield debt
We continue to believe that a number of positive factors will remain supportive. In the US, the Federal Reserve is loosening monetary policy in a resilient economic context, while in Europe, inflation is now contained. We believe the fiscal stimulus in Germany has positive implications for growth and could notably benefit sectors that have been struggling in the past two-three years (namely, industrials, chemicals, and construction).
Corporates have been able to successfully navigate an uncertain political and economic climate in 2025 marked by tariff headwinds and political instability in parts of Europe. They have been producing resilient, and in some cases, strong earnings during the second half of 2025.
Meanwhile, high interest rates create an interesting equilibrium that keeps the pressure on companies to reduce debt and prioritise bondholders over shareholders.
At the same time, high interest rates are driving capital to investment vehicles exposed to European high-yield bonds.
Therefore, we expect credit spreads to remain historically tight, while the yields on offer are historically wide. We believe the search for yield will continue to be the dominant driver and we are constructive on our asset class.
[1] Source for all data: BNP Paribas Asset Management, ICE Data Indices LLC as of 10/10/2025.
