After a period of strong performance, uncertainty in early 2025 appeared to pose a threat to Europe’s high-yield bond sector. But a new EU-US trade deal and positive economic data have created a much more hopeful outlook. European high-yield bonds delivered over 35% returns in the real estate sector alone during 2024, while the broader Merrill Lynch Euro HY BB-B excluding financials index returned just 9%.1
With much of the economic uncertainty and financial market turbulence that characterised the early months of 2025 behind us, the current outlook for European high-yield bonds is particularly encouraging. Interest rates continue to fall, and investors looking to move away from cash or diversify their fixed-income or multi-asset portfolios can benefit from the low volatility (compared to equities), attractive yields and capital growth offered by the high-yield sector.
Macroeconomic tailwinds to support high-yield
Over the medium to long term, the high-yield performance depends on wider economic conditions as well as the strength and financial health of individual issuing companies. The first half of 2025 saw considerable levels of uncertainty in Europe and beyond as a result of the unpredictable trade policy implemented by President Trump in the US.
While the trade deal announced between the EU and the US in July – which set tariffs on most European exports to the US at 15% – might not appear especially favourable, it is a considerable improvement on the 30% tariffs proposed by President Trump earlier in the year. Just as importantly, it provides businesses in Europe with a degree of certainty over international trading conditions in the months ahead.
The eurozone economy, meanwhile, proved resilient in the first six months of 2025, with the bloc’s GDP increasing by 0.7% overall. And recent political developments should support further expansion. The European Commission has announced plans to address structural and productivity issues within the EU while also cutting sustainability-related red tape on businesses. And in Germany, for example, a more business-friendly government and plans to increase defence and infrastructure spending can be expected to boost growth over the years ahead.
In terms of monetary policy, the European Central Bank has cut interest rates more quickly than its counterparts at the Bank of England and the US Federal Reserve thanks to moderating eurozone inflation. As well as allowing businesses to borrow more cheaply, this has reduced the appeal of holding cash and cash-like instruments in investment portfolios – another reason for investors to consider fixed-income options such as high-yield bonds.
Technical factors drive continued outperformance
The European high-yield segment demonstrated strong performance in both 2023 and 2024, with issuers remaining resilient in the face of external shocks and uncertainty. Corporate performance has been impressive overall, with default rates remaining low by historical standards.
As economic conditions stabilise, we remain constructive on high yield companies. The asset class should also continue to benefit from technical factors, such as positive net inflows into mutual funds as well as ongoing demand for collateral for collateralised loan obligations.
Meanwhile, 2025 has seen an increase in primary-market activity, in particular over the summer. This reflects rising risk appetite, and has the potential to lead to growth in M&A activity, as high-yield companies sell non-core assets to deleverage and pay down debts more quickly.
The European bond market as a whole is also set to benefit from the region’s growing status as a global ‘safe haven’ for fixed-income investors. Concerns over trade and fiscal policy in the US have seen the euro appreciate considerably against the dollar, and German Bunds in particular have gained from concerns around US Treasury Bills.
Active management captures sector rotation opportunities
As active managers in the European high-yield space, our positioning and approach to security selection changes in response to developments in the macroeconomic environment as well as sector and company fundamentals. We employ a high-conviction, actively managed strategy capable of generating positive returns across market conditions.
In general, we look for those parts of the high-yield universe that have the potential to deliver higher returns. This includes undervalued corporates and neglected or unfashionable sectors that may be able to take advantage of macroeconomic tailwinds in the short to medium term.
In 2024, for example, we took a large overweight position in the real estate sector at a time when bond valuations were depressed but fundamentals were starting to recover. Similarly, at the start of 2025, we responded to market uncertainty by taking a defensive position with overweights to less cyclical sectors with lower US tariff exposure, such as healthcare. Recently, as tariff-related concerns have eased, we have successfully increased our exposure to more cyclical sectors.
The automotive sector is a good example of an industry that has been burdened by excessively gloomy sentiment: European car manufacturers face strong competition from China, challenges around the transition to electric vehicles and high production costs. However, recent cost-cutting programmes implemented by carmakers are starting to bear fruit, with auto suppliers – our preference in automotive – and have enabled companies in the sector to further protect their balance sheets, despite the macro uncertainties.
Although spreads on high-yield bonds remain tight in comparison with history, 2025 has seen more pronounced levels of dispersion – the proportion of bonds trading at least 100 basis points tighter or wider than average index spreads. This means that active managers have considerable scope to identify bonds with significant upside potential.
How investors can benefit from European high-yield bonds
European high yield can play an important role in both fixed-income and multi-asset portfolios. High yield provides valuable diversification through exposure to a part of the fixed-income universe that tends to be higher risk but also less sensitive to movements in interest rates. This is because high-yield bonds generally have shorter maturities than investment-grade or sovereign debt.
As well as generating regular income – which has become increasingly valuable as cash returns have declined in recent months – high-yield bonds offer the potential for capital appreciation. In particular, bond values can rise as a result of company-specific events such as M&A, ratings upgrades and consensus-beating earnings statements. In this way, high-yield bonds offer a degree of exposure to the performance of individual companies with less volatility than equities.
The BNP Paribas Asset Management fixed-income team uses a combination of top-down macroeconomic analysis and bottom-up company research to create insights and uncover the most compelling opportunities across Europe’s high-yield sector. Our fund managers have more than two decades’ experience in issuer selection, and are supported by our expert team of credit analysts.
We put significant emphasis on risk management, focusing on issuers that have the financial strength to generate dependable returns. Sustainability is also a key element of our approach. Incorporating environmental, social and governance factors into the risk-assessment process helps us identify the most resilient issuers.
BNP Paribas Asset Management’s European high-yield strategy has more than €2 billion of assets under management and an impressive track record that dates to 2003. As such, we are ideally placed to help investors reap the benefits of recent positive market developments in the high-yield sector.
[1] https://viewpoint.bnpparibas-am.com/euro-high-yield-there-is-more-to-come/
View fund
