Global Credit Weekly

EUR credit: unpacking the resilience

November 21, 2024 | Amanda Lynam

Key takeaways

  • Elevated trade policy uncertainty has the potential to weigh on investment in the Euro Area, as a recent analysis from the European Commission highlighted. This would further add to the growth divergence (between the U.S. and Europe) that has been in place for the past several quarters. But the performance of EUR corporate credit has not reflected a weaker Euro Area growth backdrop. For example, the (lower-rated) EUR HY market has outperformed its (higher-rated) EUR IG peer so far this year – on a total return and excess return basis (Exhibit 1). And across regions, the performance of EUR credit has been similarly resilient (again, Exhibit 1).
  • We attribute the relative resilience of the EUR credit market to a few factors, including (1) the European Central Bank’s historical precedent of intervening as a purchaser of corporate credit during periods of market volatility; (2) the smaller size of the EUR credit market, relative to the USD universe, which has likely translated into a technical tailwind; and (3) an “up-in-ratings” tilt that is visible within the EUR HY index. Additionally, U.S.-incorporated issuers continue to generate a notable share of gross issuance in the EUR IG and EUR HY markets.
  • We see the most risk to corporate credit fundamentals in a potential scenario of across-the-board tariffs, which may spark retaliatory tariffs. This has the potential to weigh on corporates’ input costs and profit margins, beyond a “one time” upward price level shock. It may also shift consumer consumption patterns, depending on elasticity and substitutions. If severe input cost pressures (or other disruptions to profitability) materialize, corporates may reduce headcount to protect margins, which could have negative consequences for the broader economy.
  • As a result, granular credit and sector selection will be important in 2025, given the residual policy uncertainty. Like the view we outlined (for the USD IG market) last week, we see attractive relative value in the Banks sector within the EUR IG universe.

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Author

Amanda Lynam, CPA
Head of Macro Credit Research, Portfolio Management Group – Private Debt
Amanda Lynam, CPA, is Head of Macro Credit Research within the Portfolio Management Group - Private Debt. In this capacity, Amanda leads original market research across a range of asset classes, including global corporate debt markets as well as private debt, real estate and infrastructure lending.
Dominique Bly
Macro Credit Research Strategist, Portfolio Management Group – Private Debt
Dominique is a Macro Credit Research Strategist. Prior to joining BlackRock, Dominique was an Investor Relations professional at Neuberger Berman, specializing in Private Debt, and a Consultant at Accenture. Dominique received a Bachelor of Science in Business Administration from UC Berkeley Haas.

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