- Euro investment-grade bonds are on pace for their best monthly return in over a year; euro junk bonds haven’t gained this much since 2023 — the bet on higher yields absorbing war-driven inflation risk is paying off
- Credit spreads have remained remarkably contained — widening only 16 basis points since the war began, versus 128 bps in one week during Trump’s Liberation Day volatility in April 2025
- European credit funds saw inflows across most categories in the week to April 15 for the first time since March, with pan-European high-yield seeing its biggest weekly inflow since the war started
- JPMorgan strategists are already recommending hedges against spread blowout via iTraxx Main payer options, warning “Euro credit spreads are pricing a close to best-case scenario” with asymmetric downside risk
What Happened?
Credit investors who bought corporate bonds during the Iran war — betting that rising government bond yields would provide enough income cushion to offset energy shock and inflation risk — are collecting on those bets. Euro investment-grade bonds are heading for their best monthly return in more than a year, and euro high-yield bonds haven’t gained this much since 2023. The Bloomberg Euro Corporate Index saw yields spike as much as 70 basis points from pre-war levels in March, peaking above 3.8% — a level that attracted buyers who expected any market shock to be temporary. Yields have since come down to 3.5% as ceasefire optimism has taken hold. Credit spreads, notably, barely moved: just 16 basis points of widening since Feb. 28, compared to 128 basis points in a single week during April 2025’s Liberation Day volatility.
Why It Matters?
The resilience of credit spreads through the Iran war is the most surprising element of the credit market story. Traditional models would have predicted significantly wider spreads given the energy shock, inflation risk, and growth uncertainty the conflict produced. Instead, the combination of higher overall yields — providing an income buffer — and continued fund inflows prevented the forced selling that typically drives spread blowouts. German bund yields hit their highest since 2011 last month, and the ECB is now expected to hike twice this year with the first move in June. That rising-rate backdrop has paradoxically supported credit by making the carry attractive enough to absorb risk. The danger is that this dynamic has left spreads at the tighter end of historical ranges, pricing a near-best-case scenario, even as inflation and growth risks from a six-week energy shock have “already baked into the system,” per RBC BlueBay’s CIO.
What’s Next?
JPMorgan’s credit strategists are already positioning for the other side of this trade, recommending hedges against spread widening through iTraxx Main options. Their logic: with spreads near best-case levels, the risk-reward is asymmetric to the downside. RBC BlueBay sees oil staying above $80 even with a near-term deal — an inflationary floor that will keep pressure on corporate margins. Any deal failure, ceasefire breakdown, or sustained growth shock could rapidly close the income advantage that made the war-dip buy trade work. For now the bulls are right. But the window in which they can be wrong is opening again.
Source: Bloomberg
