Despite elevated volatility and low spreads, attractive yields and strong inflows are supporting Europe’s corporate bonds, writes Insight Investment1 portfolio manager Fabien Collado. Here he outlines the opportunities in this market and highlights some of the key sectors offering investors the potential for diversification and selective value.
Key points:
- Market volatility can boost opportunities for active bond selection and Insight sees value in financials, utilities, property, and automotive sectors.
- The €3.2 trillion European corporate bond market offers the potential for attractive yields amid strong inflows, supporting spread stability and diversification.
- Selective credit analysis is key to capturing opportunities in Europe’s cyclical and defensive sectors.
Market opportunity
Elevated market volatility has made for an eventful year so far in Europe’s credit markets. But rather than fear it, we embrace volatility as a key ingredient of active fund management. We believe it aids our ability to identify bond opportunities from across sectors.
It would be fair to say that euro corporate bond credit spreads are tight relative to history, but we believe the overall level of yields in the market is attractive. This higher yield environment has seen increased flows into the asset class. In fact, so far in 2025 we have seen the second-highest euro investment grade credit inflows in the past six years2. This inflow is capping credit spreads – a positive development in our view – and we don’t see these technical forces fading any time soon.
In terms of scale, as at the end of June 2025 the euro-denominated corporate bond market exceeded €3.2 trillion and had over 3,700 issuers3. This depth provides investors with greater opportunities to express views on specific sectors and improve diversification versus smaller markets.
With this in mind, we see opportunities across four key sectors within the euro-denominated credit market.
1. Banks
We see attractive value in the banks sector. Typically, one would expect the spread of this sector to trade inside that of non-financials but that is not the case. This, in tandem with strong fundamentals, means we are happy to remain overweight banks.
2. Utilities
The utilities sector has been in focus in recent years in light of the energy crisis in Europe that evolved following Russia’s invasion of Ukraine. This episode attached greater importance to the energy transition as European leaders acknowledged the urgent need for energy independence.
To finance the transition, parts of the utilities sector have issued debt in the primary market and Capex has increased. Some of this debt has been issued with attractive new issue premiums, creating opportunities to lock in attractive yields. Green bonds have played a key role in this.
Utilities is a defensive sector given its largely domestic focus and tends to be less cyclical than other sectors. In the context of geopolitical tension and trade wars, we believe these attributes can offer some portfolio immunity.
3. Property
Property has been an eventful sector over the last four years. It has historically has issued a lot of debt and it performed poorly in 2022 when inflation and interest rates were rising. However, we believe it has normalised and now offers a spread pickup versus the rest of the market. But being selective on bonds in this sector is important as some names remain vulnerable and at risk of downgrade. Overall, however, it is a sector that still offers value.
4. Automotive
The automotive sector has been cyclical, and vulnerable in the face of trade wars and tariff announcements. It suffered significantly last year because some tariffs were priced in even before the announcements were made. But it has since held up, maintaining spread pickup compared with where one would typically expect the sector to trade. As always, being selective is crucial but with thorough credit analysis we see the automotive sector offering opportunities.
Summary
Overall, despite the challenges of elevated volatility and compressed spreads, we believe Europe’s corporate bond market presents opportunities for those seeking yield and diversification. The market’s depth combined with strong inflows support spread stability and create fertile ground for active, selective credit strategies that can embrace volatility as an opportunity rather than a risk.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
2729600 Exp: 17 April 2026
