Fixed income
Why now? The case for European high yield
4 min read 1 Sep 25
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As investors reassess their fixed income allocations, we believe the European high yield (HY) market is emerging as a compelling opportunity. European HY has matured into a robust and diversified asset class, offering attractive risk-adjusted returns and strategic diversification benefits.
The European HY market has developed significantly over the past two decades. It is now a mature, sizeable, and well-diversified segment of the capital markets. While US capital markets remain larger in absolute terms than those in Europe, the respective HY markets are comparable in relative terms. European HY is roughly one-third the size of the STOXX 600, just as US HY is about a third of the size of the S&P 500.
Not only does the European HY market have depth, but it also possesses breadth; with 354 issuers across 18 sectors and 57 sub-sectors, the market provides broad exposure and mirrors the sectoral diversity found in US HY. This diversity creates opportunities for an active manager to move to sectors where there is most value.
“The European HY market is now a mature, sizeable, and well-diversified segment of capital markets.”
The European edge
First and foremost, the European HY market has outperformed the US HY market over five, 10 and 20 years. Despite a high correlation between the two markets, Europe’s superior long-term performance underscores its resilience and relative value.
| Performance | 5yr | 10yr | 20yr |
|---|---|---|---|
| US HY returns (hedged to Euro, p.a.) | 4.26% | 3.22% | 5.00% |
| Euro HY returns (p.a.) | 4.74% | 3.80% | 5.88% |
| Outperformance of Euro HY relative to US HY (p..a) | 0.48% | 0.58% | 0.88% |
| Correlation of monthly returns | 89.50% | 90.80% | 91.10% |
Source: ICE BofA US High Yield Index, OAS (Ref: H0A0), ICE BofA Euro High Yield Index, OAS (Ref HE00) as at June 2025. Past performance is not a guide to future performance.
Higher credit quality, lower default risk, attractive valuations
As European HY has evolved, not only has it expanded but it’s credit quality has improved too. European HY has a higher concentration of BB rated bonds and fewer CCC rated issuers than US HY. Comparing average credit ratings, the ICE European High Yield Index is rated BB-, while the ICE BofA US High Yield index carries a lower average rating of B+.
While European HY is diversified across sectors, US CCC bonds also tend to be concentrated in energy sectors that can be more volatile, adding additional risk.
As a result, the higher credit quality, combined with strong fundamentals, has translated into lower default rates. The average default rate for US HY is 3.5%, while for Europe it stands at 2.6%.
Despite its higher credit quality, European HY currently offers higher yields than US, when hedged to euros. The yield-to-worst of the EUR HY index stood at 5.36%, compared to 4.68% for the US HY index when hedged to euros as at 30 June 2025. This presents a good opportunity to earn more without taking on additional credit risk, a rare opportunity for investors seeking both quality and yield.
“Despite its higher credit quality, European HY currently offers higher yields than US, when hedged to euros.”
Europe leads in ESG integration
Europe has played a leading role in ESG integration, with around 25% of the HY market consisting of Green, Social or Sustainable bonds, compared to just 3% in the US. Additionally, Europe’s Weighted Average Carbon Intensity (WACI)1 is significantly lower, making it a more attractive option for ESG-focused investors.
A supportive backdrop
While the global growth outlook remains uncertain, Europe stands to benefit from increased defence spending and a more accommodative monetary policy. The European Central Bank is likely to provide a supportive backdrop both for growth and the high yield market. It is expected to continue cutting rates, which could support HY performance as cash rates decline, as well as bolster growth in the region.
Furthermore, the uncertainty surrounding Trump’s tariff policy with regard to the European Union (EU) has become clear. The US-EU trade deal, which sees a 15% tariff on most goods in place of the proposed 30%, has provided clarity for both governments and businesses in the EU and provides a framework for growth moving forward. Meanwhile, a renewed fiscal impulse in the form of the release of Germany’s debt brake and increased defence spending across Europe could also be supportive.
“A combination of supportive fundamentals, constructive technical, attractive yields and limited duration continues to underpin the appeal of the asset class.”
The asset class has seen total flows rising steadily since 2023, and issuance is expected to increase over 2025. A combination of supportive fundamentals, a constructive technical backdrop, attractive yields and limited duration continues to underpin the appeal of the asset class.
1M&G, Aladdin, June 2025
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
