IN FOCUS6-8 min read
Schroders Credit Lens June 2025: your go-to guide to global credit markets
Credit spreads are uncomfortably tight but still more than cover long-term default losses.
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Links to all three versions of the Credit Lens are provided below and at the bottom of the page.
- Credit spreads have fallen back to uncomfortably low levels. Euro corporate bonds offer a spread pickup over USD ones (slides 4, 36-37)
- Companies are more levered than when borrowing costs were last at these levels, especially US ones. But interest cover is mostly ok, upgrades are outpacing downgrades, and defaults are low/falling. USD IG is the main exception where, although interest cover is high in absolute terms, it is low vs history (slides 5-7, and 38).
- Higher government bond yields mean you can still get >5% yield on IG, >7% on HY, despite tight spreads (for fx-hedged USD and GBP investors, 3% and 5% for EUR investors). EUR yields are once again higher than USD yields on a fx-hedged basis. (slide 8)
- With yield curves steepening, corporate bond yields have moved back above cash rates in all markets. EUR and GBP corporate bonds offer a bigger pickup than USD ones, a reversal of the start-of-year situation (slides 9-10)
- Yes spreads are tight but, in the long-run (slide 11):
- 99.9% of investment grade bonds/year have not defaulted
- 96% of high yield bonds/year have not defaulted, on average
- Even when spreads have been tight in the past, investors who held to maturity have earned a positive return, net of defaults. For buy-and-hold investors, credit spreads still offer a premium over long-term default & downgrade losses (albeit a below-average one). (slides 12-13)
- Tight spreads present more of a risk for tactical positions, as it would take only a small rise in spreads to leave investors underperforming government bonds.
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