European credit: Enough to go around?

June 4, 2025

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In his latest column on the key developments, themes and opportunities in credit markets, Ian Horn examines what a move away from US dollar-denominated assets could mean for European credit.

Much has been said and written about what political developments could mean for historically US dollar-centric investors. Within the context of short-duration credit, my colleague Eric Schure wrote recently on the benefits of investing globally, particularly during a period of uncertainty in US markets.

In credit, the most obvious potential beneficiary of increased diversification in portfolios heavily exposed to US dollar assets is the EUR market. However, the two markets are structurally different.

Firstly, the EUR market is significantly smaller. This asymmetry means that any flows out of US dollar assets would have a disproportionate impact on the EUR market. A 5% shift of capital out of US investment grade credit would represent a 12% inflow to its equivalent EUR market. The situation is even more marked in high yield - a 5% outflow from the US would equate to a 16% inflow in Europe.¹

The numbers here are hypothetical and intended simply to highlight an important asymmetry. There are various arguments against a broad de-dollarisation by the financial community; however, even marginal re-weightings could have a significant impact on EUR credit.

A long story

Comparing the size of the USD and EUR markets by duration reveals that this impact is unlikely to be uniform. Any flows from US to EUR credit should logically be particularly supportive for longer-dated EUR credit, where the size differential is most extreme. Figure 1 shows the proportion of the EUR market that a 1% reallocation from segments of the US credit market would represent.

We have said for some time that longer-dated spreads are historically tight in Europe (particularly compared to shorter-dated credit), and continue to hold that view. However, any rotation into EUR credit is likely to ensure continued strong demand for longer-dated paper in Europe.

Will supply follow demand?

It stands to reason that should investor demand shift to Europe - even marginally - then supply will soon follow. That has been evident recently, with 2025 seeing the busiest May on record for EUR corporate issuance.² This was thanks in part to US issuers tapping EUR markets, including multi-tranche deals from the likes of pharmaceutical giant Pfizer, online travel company Booking Holdings, and the data centre and internet services provider Equinix. In the first 5 months of 2025, ‘reverse Yankee’ issuance has already exceeded the previous full-year record.²

A shift in issuance patterns could offset some of the positive technical from investors allocating to EUR credit. However, we believe the net technical impact will remain positive, with a ‘scarcity value’ reflected in non-USD spreads, particularly where technical imbalances are greatest.

References

1. ICE Index Platform, as of May 31, 2025
2. Santander Corporate & Investment Banking, ‘Primary Watch,’ May 30, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of June 2025, and may change without notice.

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Index descriptions

C0A0 - The ICE BofA  US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

C1A0 - ICE BofA 1-3 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity less than 3 years.

C2A0 - ICE BofA 3-5 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

C3A0 - ICE BofA 5-7 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

C4A0 - ICE BofA 7-10 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

C9A0 - ICE BofA 10+ Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than 10 years.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.

ER01 - The ICE BofA ML 1-3 Year Euro Corporate Index is a subset of ICE BofA ML Euro Corporate Index including all securities with a remaining term to maturity less than 3 years.

ER02 - ICE BofA ML 3-5 Year Euro Corporate Index is a subset of ICE BofA ML Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

ER03 – ICE BofA 5-7 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years. Inception date: December 31, 1995

ER04 - ICE BofA 7-10 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

ER09 - ICE BofA 10+ Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 10 years.

HE10 – The ICE BofA BB Euro High Yield Index is a subset of the ICE BofA  Euro High Yield Index (HE00) including all securities rated BB1 through BB3, inclusive.

HE20 – The ICE BofA  Single-B Euro High Yield Index is a subset of the ICE BofA  Euro High Yield Index (HE00) including all securities rated B1 through B3, inclusive.

HE40- The ICE BofA  CCC and lower Euro High Yield Index is a subset of the ICE BofA  Euro High Yield Index (HE00) including all securities rated CCC1 or lower.

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