Single Bs, singled out?

November 5, 2025

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In his latest column on the key developments, themes and opportunities in credit markets, Ian Horn discusses the divergence between the performance of single-B rated European bonds versus their higher rated peers.

For most of the European market, October was a round-trip for credit spreads. Various early-month headlines pushed spreads wider, including President Trump threatening 100% tariffs on Chinese goods and casting doubts over his meeting with President Xi.¹ The market also reacted to news of two high-profile US bankruptcies (Tricolor and First Brands), Jamie Dimon’s “cockroach” comments,²  new US-Russian sanctions³ and losses at US regional banks⁴ that triggered concerns of systemic risk.

However, as seen in previous bouts of volatility this year, wider spreads soon found buyers. Trump’s team duly started negotiations with their Chinese counterparts, and the various signs of credit stress were largely assumed to be idiosyncratic.

However, one market has failed to rally back - the European single-B market.

As Figure 1 shows, European single-As, BBBs and BBs all finished the month close to the levels seen towards the end of September. However, single-Bs have meaningfully lagged and are still almost 50bps wider over that time period.

Has this divergence been specific to the European market? It appears so. Figure 2 shows the same chart - on the same scale - for the US markets. Here we see more stable single-B spreads, and a recovery in-line with other rating categories.

The US single-B market is known to be more established, better diversified and perhaps less idiosyncratic than its European counterpart, but it does seem there’s something worth investigating.

Another way to show this - and to highlight the divergence in the single-B market - is to look at spread differentials between BB and single-B credit. Figure 3 plots these differentials for 2025 in both Europe and the US. At the end of October, the spread premium in single-Bs over BBs was close to the year-to-date highs in Europe, but close to the year-to-date tights in the US.

We believe there are several factors at play, but one worth focusing on is a dynamic we have previously highlighted.

In Europe, the CLO and high yield bond markets are more inter-linked than in the US. European CLOs typically have a higher capacity to own high yield bonds and, back in November 2024, we estimated European CLOs owned approximately 9% of the European high yield market. As the CLO market has grown, this demand for bonds has helped underpin high yield spreads so far this year.

However, as investors start to fear the rating cycle is turning, questions are being asked about what CLOs will do if their single-B bond holdings are downgraded to CCC. CLOs typically have constraints on CCC holdings, and market participants fear many CLOs are nearing those limits.

We believe this fear of pre-emptive - or even forced - single-B selling is one reason why they have lagged. This would also explain why the theme has been specific to Europe.

For our crossover strategies we remain cautious on single-B risk in this tighter valuation and uncertain macroeconomic environment. We believe the European dynamic we have discussed further supports this view.

 

References

1.BBC news, as of 10th October. “Trump threatens to impost additional 100% tariff on China.”
2.Reuters, as of 14th October, 2025. “First Brands, Tricolor collapse raise fears of credit stress, with Dimon warning of ‘more cockroaches’”
3.US Department of the Treasury, as of 22nd October 2025. “Treasury sanctions major Russian oil companies, calls on Moscow to immediately agree to ceasefire.”
4.Financial Times, as of 16th October 2025. “US regional bank shares sink on credit worries after fraud disclosures.”

 

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 October 2025, and may change without notice.

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Index descriptions

ER40 – The ICE BofA BBB Euro Corporate Index is a subset of the ICE BofA Euro Corporate Index (ER00) including all securities rated BBB1 through BBB3, inclusive.

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.

ICE BofA Single-A US Corporate Index (C0A3) ICE BofA Single-A US Corporate Index is a subset of ICE BofA US Corporate Index including all securities rated A1 through A3, inclusive.

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, inclusive.

J0A1 – The ICE BofA  BB US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated BB1 through BB3, inclusive.

J0A2 – The ICE BofA  Single-B US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated B1 through B3, inclusive.

ICE BofA Single-A US Corporate Index (C0A3) ICE BofA Single-A US Corporate Index is a subset of ICE BofA US Corporate Index including all securities rated A1 through A3, inclusive.

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, inclusive.

J0A1 – The ICE BofA  BB US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated BB1 through BB3, inclusive.

J0A2 – The ICE BofA  Single-B US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated B1 through B3, inclusive.

ER30 – ICE BofA Single-A Euro Corporate Index is a subset of ICE BofA Europe Corporate Index including all securities rated A1 through A3, inclusive

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