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2025 Outlook for European Fixed Income: From Uncertainty to Opportunity

07 January 2025

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John Taylor| Head—European Fixed Income; Director—Global Multi-Sector

Souheir Asba| Portfolio Manager—Investment Grade Credit

Jamie Harding, CFA| Portfolio Manager—European Credit

For a deeper dive into this topic, read European Fixed-Income Outlook 2025: Adversity, Uncertainty, Opportunity.

TRANSCRIPT:

John Taylor: In 2024, we had a lot of election risk driving market volatility, and as we enter 2025, we still have a lot of political uncertainty in the form of French and German politics, as well as uncertainty from outside of Europe in the form of tariffs.

But that does create some certainty in the form of the ECB continuing to cut interest rates from 4 to 3 to 2[%], and maybe even below, in an environment of fairly weak growth and low inflation.

That’s a really good environment for bonds in the 0- to 10-year maturity bucket, which are going to be pulled lower as the central bank cuts interest rates, while the longer-dated bonds might be more negatively impacted by the fiscal deterioration we’ve seen across governments globally, so maybe some steepening of the curve there.

With that macro backdrop, Souheir, what are the implications for the European corporate investment-grade market?

Souheir Asba: The macro backdrop that you've described is pretty positive for credit. We think that as money goes out of the money-market funds from cash and into investment grade, that will continue the positive flow backdrop that we've seen throughout the year. We think that that will continue as the ECB continues to cut and the curves continue to re-steepen.

JT: So the yield argument is pretty compelling. Are you concerned at all about credit spreads being pretty tight?

SA: Well, if you look at where Euro investment grade is trading, it’s still pretty attractive on a relative value basis. And then if you dig deeper into the breakevens—i.e., how much of a spread move wider do you need to lose money on the year—it's around 23 basis points, which is equivalent to over a 20% move overall. That’s a pretty large move.

We need to put that in context of a fundamental perspective. We’re going into the year with stronger fundamentals, cleaner balance sheets, and really the appetite for any corporate to go into aggressive capital deployment—M&A, share buyback—is relatively limited due to that macro uncertainty. So, from a credit perspective, that’s a positive backdrop for us.

JT: Thank you. Jamie, does that positivity carry over to the European high-yield market?

Jamie Harding: To a degree. As a starting point, we’re cautious, given the risks, post the US election, potentially to the downside on growth. But the prospect of a 5% to 6% total return next year in European high yield is fairly high. The starting yield matters, and it’s very attractive now at 5.75%, versus more recent times.

JT: And what would need to happen to see a negative return in high yield?

JH: You’d have to see yields move around 225 basis points higher, which is very extreme. You’re talking yields around 8%, which we saw around the COVID period and when Russia invaded Ukraine. So, a big reset higher for our total return to be completely wiped out in high yield.

To Souheir’s point, fundamentals are in an okay spot, but you’re likely to see dispersion going forward. So, there’s plenty of opportunities to exploit across sector and security—and it’s perfect for active management.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

John Taylor

John Taylor is Head of European Fixed Income and Director of Global Multi-Sector at AB. He is a senior member of the Global Fixed Income, UK and European Fixed Income, and Absolute Return portfolio-management teams. Prior to this, Taylor was responsible for the management of single-currency portfolios. He joined the firm in 1999 as a fixed-income trader and was named in Financial News’s 40 Under 40 Rising Stars in Asset Management in 2012. Taylor holds a BSc (Hons) in economics from the University of Kent. Location: London

Souheir Asba

Souheir Asba is a Vice President and a Portfolio Manager for Investment Grade Credit, overseeing AB’s euro investment-grade and global investment-grade credit portfolios. Asba started in the industry in 2012 and joined AB in 2024. Before AB, she worked at BlackRock as a portfolio manager in the Global Investment Grade Credit team, managing retail and institutional mandates and focusing on global sustainable accounts, both on new client pitches and existing funds. Previously, Asba worked as a European credit strategist at Bank of America, covering both investment-grade and high-yield strategies. Prior to that, she was an economist at Société Générale Corporate and Investment Banking. Asba holds an MIM in financial markets and an MBA from ESSEC Business School, France, and an MEng in geospatial engineering from the Hassania School of Public Works, Morocco. Location: London

Jamie Harding, CFA

Jamie Harding is a Vice President and Portfolio Manager for European Credit, focusing on high-yield and income strategies. He joined the firm in 2012 and assumed the role of Portfolio Manager in 2022. Harding has also worked within AB as an associate portfolio manager on the European High Yield and European Income portfolios and as a global fixed-income product specialist within business development. He holds a MSc in international economics, banking and finance from Cardiff University. Harding is a CFA charterholder. Location: London

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2025 Outlook for European Fixed Income: From Uncertainty to Opportunity

TRANSCRIPT:

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