So far, so good

July 4, 2025

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In his latest column on the key developments, themes and opportunities in credit markets, Ian Horn sets out six ideas for investors to look out for in the second half of the year.

As we enter the second half of 2025, we feel it is timely to summarise some of our current macro views, and market dynamics credit investors should be aware of.

While interest rates will be a key determinant of total returns, here we focus more specifically on credit spreads, relative value within credit markets, and portfolio construction, which we think can drive additional value in the coming months.

Credit quality

1. Spreads: Value in short-dated credit and "belly" of the curve

With spread curves historically flat, and long-dated spreads compressed by a lack of recent issuance, we believe credit spreads are most attractive in short-dated credit and the 3-7-year 'belly' of the curve. We expect historically tight long-dated spreads to support a resurgence of issuance in this part of the market, which in turn could weigh on spreads. Meanwhile, in our view, short-dated credit spreads should be supported as investors reallocate into this segment from lower-yielding cash-like products.

2. High yield: Scarcity value makes EUR attractive

A shrinking high yield market in Europe,¹ coupled with strong demand,² has created a strong technical that should underpin spreads over the coming months. Rising stars, as well as a modest migration to the loan and private credit markets, has resulted in a shrinking pool of opportunities. Meanwhile, we sense that investors increasingly want to diversify their US exposure with Europe emerging as a favoured option.²

Regional exposure

3. Emerging markets: Remain selective, focus on themes

Historically tight spreads versus developed markets³ support a more conservative position in our view, and a focus on specific value within emerging markets. Some themes we have identified include domestic 'champions' that are less impacted by tariffs, cash-generative gold miners, the Indian growth story, and leading banks in Eastern Europe.

4. Yankee issuance: Tight valuations favour lower exposure

One noteworthy trend in the first half was rising demand for US dollar-denominated bonds from European issuers.⁴ The thesis here being that US dollar investors want to diversify credit risk away from the US within a USD portfolio. Whilst we understand the rationale, we see limited opportunity here when looking at valuations versus the broader USD investment-grade market.

Portfolio construction

5. Yield curves: Increased focus on capturing 'roll-down'

As covered in our recent article, Return of the roll down, steeper yield curves today support an increased focus on capturing additional returns from 'roll-down'. This increases the incentive to actively manage credit portfolios, rotating holdings to maximise the return captured by bonds 'rolling down' the yield curve.

6. Seasonality: Focus on minimising cash and maturities through the summer

Whilst this may seem obvious, ongoing maturities are a blessing and a curse for short-dated credit strategies. With primary markets expected to quieten down during the summer months, as well as seasonally low investor activity, we are focused on reducing cash balances. We are also looking to 'push out' any maturities over the next few months to ensure cash remains low.

 

References

1.ICE Data Platform, ICE BofA BB-B Euro High Yield Index (HE40), as of June 30, 2025
2.Reuters, ‘Investors flock to Europe as bloc's stability contrasts with concerns over US,’ June 30, 2025
3.ICE Data Platform, ICE BofA BBB Emerging Markets Corporate Plus Index (EM2B), ICE BofA  BBB US Corporate Index (C0A4), as of June 30, 2025
4.International Financing Review, ‘European banks still keen on Yankee funding,’ May 9, 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 July 2025, and may change without notice.

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Index descriptions

HE40 - The ICE BofA BB-B Euro High Yield Index is a subset of ICE BofA Euro High Yield Index including all securities rated BB1 through B3, inclusive.

EM2B - The ICE BofA BBB Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, including all securities rated BBB1 through BBB3.

C0A4 – The ICE BofA  BBB US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities rated BBB1 through BBB3.

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