Bond Bulletin

Bond Bulletin: Investment grade debt — Diverging paths across the Atlantic

Bond Bulletin
Bond Bulletin
GFICC Investors

Published: 20-03-2025

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.

While US IG spreads have widened, European investment grade (IG) spreads have tightened and are now trading inside US IG for the first time since 2022. We investigate what has been driving the divergence in recent weeks and tactical opportunities that may be emerging for investors.

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Fundamentals

The fundamental drivers behind the spread divergence are rooted in differing macroeconomic conditions. In the US, declining sentiment has pushed IG spreads wider as investors grow increasingly concerned about the potential impact of recently announced tariffs on economic growth. Fears that higher trade barriers could weigh on corporate margins and consumer demand have created a more cautious tone in US credit markets. In contrast, sentiment in Europe has improved, supported by expansionary fiscal measures, particularly from Germany. The German government’s decision to increase spending has bolstered confidence in the region’s growth prospects, helping to drive euro IG spreads tighter. The differing macro outlooks reflect the US moving towards late-cycle dynamics while Europe appears to be benefitting from renewed fiscal stimulus. At the corporate level, the story is more nuanced. Despite the macro uncertainty, the underlying credit fundamentals for US IG issuers remain robust. Earnings have generally met expectations and balance sheets remain solid. That said, a slower and more uncertain US economic growth outlook would naturally feed into lower future earnings and revenue growth. In Europe, the corporate backdrop looks even stronger. European companies have generally reported earnings ahead of expectations, with both margin expansion and revenue growth providing support. This improved earnings trajectory has reinforced investor confidence, contributing to spread tightening.

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Quantitative valuations

The recent divergence in spreads has shifted the relative value picture in favour of US IG. Following the widening in US spreads, valuations now look more compelling on a tactical basis. An important – and sometimes overlooked – driver of the recent moves has been the shift in swap spreads. Since IG issuers are typically global, they have flexibility to issue debt in the most cost-effective region and swap spreads are an important factor in that assessment. Indeed, contrasting moves this year in swap spreads (wider in the US, narrower in Europe) have also helped propel the outperformance of euro vs. US IG. The spread widening in US IG has been broad based across all rating tiers, reflecting macro concerns rather than a change in underlying credit risk. In a genuine recessionary environment, lower-rated bonds would typically widen more sharply than higher-rated bonds. The fact that this has not happened suggests that the market repricing has been driven more by sentiment than by deteriorating fundamentals, creating potential value in high-quality US IG. In Europe, the rally in IG spreads has made valuations less attractive on a relative basis. While the fundamental and macro backdrop remains supportive, tighter spreads suggest limited room for further compression, raising the possibility of more balanced risk-reward dynamics going forward.

US IG spreads have widened and valuations now look attractive vs. euro IG on a tactical basis

US IG spreads have widened and valuations now look attractive vs. euro IG on a tactical basis

Source: Bloomberg. Data as of 18 March 2025. OAS = option-adjusted spread.

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Technicals

From a technical perspective, demand remains a key driver in both markets, supported by structural demand from both retail and institutional investors. Supply has been relatively strong for most of the year, although it has moderated in recent weeks amid higher market volatility. Despite this, demand has remained firm, supported by investors looking to lock in higher yields. Retail demand has continued into March despite negative total returns in both markets, suggesting that investors are still attracted to the greater yield pickup relative to cash, particularly as central banks continue to cut rates.

What does this mean for fixed income investors?

The recent divergence in US and euro IG spreads presents investors with a shifting opportunity set. US IG now looks more attractive on a tactical basis, with recent spread widening offering improved entry points, particularly in high-quality names where fundamentals remain solid. European IG, while supported by strong earnings and improved sentiment, appears to have less room for further upside given tighter valuations and a more challenging interest rate backdrop. For investors navigating global credit markets, this divergence underscores the importance of being selective and tactical in positioning across regions.

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.



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935940f3-b719-11ef-b028-a33e9214ecc9
GFICC Investors

Published: 20-03-2025

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.

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