Is strong bid for European credit a blueprint for US?

August 1, 2025

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In his latest column on the key developments, themes and opportunities in credit markets, Ian Horn explains why US short-duration credit could be back in favour in the coming months.

Over the last few quarters, we have seen notable outperformance of short-dated EUR credit spreads. This is seen clearly in Figure 1, where we plot the change in 1-5 year BBB spreads since September last year.

There have been several reasons behind this development. European credit has generally felt in demand, as global investors look to diversify their US exposure,¹ while the smaller size of the EUR market has likely amplified the impact of any incremental allocations. We wrote on this theme in June.

Deeper cuts

However, when looking specifically at short-dated credit, there has been another source of structural support. Rate cuts from the European Central Bank (ECB) have been delivered at a much quicker pace than by the Federal Reserve (Figure 2). Lower policy rates have catalysed spread compression in short-dated credit as cash has become less attractive for EUR-based investors.

In other words, investors have been ‘pushed’ out of cash by diminishing deposit rates, and ‘pulled’ into short-dated credit by the yield pick-up over cash. This is a dynamic that appears much less developed in the US.

Cashing out

Figure 3 shows the impact of this on credit markets visually. Here, we plot the difference between policy rates - as a proxy for cash deposit rates - and short-dated BBB yields. This is essentially plotting the incentive for investors in USD and EUR to move from cash into short-dated credit.

As the chart shows, the incentive to move out cash has become significantly larger in Europe. However, as further rate cuts in the US get nearer, we anticipate a similar increase in demand for short-dated US credit in the coming quarters. Whilst rate cuts might already be priced in, spread compression driven by investors moving out of lower-yielding cash is not.

So, although we continue to like EUR credit in our short-duration accounts, Fed rate cuts can be expected to: reduce the currency hedging cost of holding USD credit, making US yields increasingly attractive in currency hedged portfolios, and increase the yield incentive for investors to move from cash to short-dated USD credit.

As a result, we expect to see increasing value in USD credit over the coming quarters in our short-dated strategies. Specifically, we expect increased demand for USD credit as rate cuts materialise, just as we have seen in Europe.

References

1.Financial Times, ‘Investors shift away from US bond market on fears over Donald Trump’s policies,’ May 22, 2025

Past performance is not a reliable indicator of current or future results

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 August 2025, and may change without notice.

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Index descriptions

ER4V: The ICE BofA 1‑5 Year BBB Euro Corporate Index tracks euro‑denominated corporate bonds rated BBB with maturities between 1 and 5 years

CVA4: ICE BofA 1-5 Year BBB US Corporate Index tracks US dollar‑denominated corporate bonds rated BBB with maturities between 1 and 5 years

FDTR: The FDTR Index is a reference for the Federal Funds Target Rate – Upper Bound, which is the upper limit of the target range set by the Federal Open Market Committee.

EUORDEPO: The EUORDEPO Index is a reference for the Deposit Facility Rate, set by the European Central Bank.

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