The third quarter of 2025 turned out to be no less significant than the second. Spreads have tightened further, despite repeated warnings that risks are still lurking. Markets appear unperturbed by the tariff news that continues to surface under the current US administration.
Even Trump’s growing influence over the Fed, once unthinkable, has failed to make a dent in sentiment. The downward revisions of labor market data, together with the new inflationary pressures signaled by leading indicators, have made a stagflation scenario more likely, but even these developments have not affected risk appetite. After several false alarms, in which spreads widened on recession fears that never materialized, investors have little desire to hedge again.
The result is a credit market that seems, in Pink Floyd’s words, “anaesthetized by risk.” Investors calmly hold long positions, unconcerned by risk and seemingly indifferent to the warning signs around them. Excess optimism, it seems, has become the prevailing mood.
Credit markets currently appear calm, with technical factors supporting their resilience. The challenge is to generate income while remaining prepared for risks to resurface.
Spreads are very tight, but sentiment remains positive. Despite persistent stagflation risks and geopolitical tensions, investors remain optimistic and credit markets show little sign of tension.
Strong fundamentals continue to support credit strength. High demand, oversubscribed issuance and increased liquidity keep spreads resilient even at tight levels.
Quality is a determining factor in the current market. We favor euro credit over US dollar credit, shorter spread duration and high-quality IG securities, while maintaining disciplined and selective HY exposure.
OPPORTUNITY
Quality credit remains the benchmark: the high-quality investment grade segment continues to offer the best balance of yield and resilience at current valuation levels.
Europe stands out compared to the US: shorter duration, favorable fundamentals and greater spread compression make euro credit relatively attractive.
Emerging markets continue to show strength: deleveraging, slowing inflation and strong local demand support resilience, with Asia continuing to stand out as a standout region.
RISKS
Valuations leave little margin. With spreads near historic lows, even modest shocks could result in negative returns.
Inflationary pressures could re-emerge. Tariffs, wage growth and increased energy demand could keep inflation high and undermine the defensive role of credit.
Geopolitics remains an unpredictable factor. Tensions in the Middle East, Russia’s hybrid tactics and US political uncertainty could quickly shift sentiment.
POSITIONING
We prefer euro credit over dollar credit: favorable fundamentals, shorter duration and relatively stronger technicals support our preference for Europe.
It is important to keep the duration of the spread short and focus on quality: we underweight the long segment of the USD curves and focus on high-quality investment grade securities.
Maintain discipline in the high-yield sector: We adopt a neutral beta in BB/B credits, maintain a cautious stance towards CCCs and remain selective where dispersion is high.
Focus on resilient finances: European banks’ subordinated debt continues to offer relative value, even in a context of mild slowdown or geopolitical tensions.
