European credit—an income investor's best-kept secret?
Global investor demand for credit has tended to prioritize the United States over Europe; however, many European credit assets have consistently delivered higher returns with lower volatility than their U.S. counterparts. We believe that there are further relative value opportunities for geographically agnostic, multi-asset credit strategies that can flexibly allocate between the two regions.
Key takeaways
- European credit has consistently outperformed U.S. credit across multiple sub-asset classes over 1-, 3-, 5-, and 10-year periods.¹
- We believe that accessing European credit income within a global, diversified, multi-asset credit portfolio could improve risk-adjusted returns when using a bottom-up, fundamentally driven research approach.
- Europe is among the most favorable jurisdictions for creditors and income-seeking investors globally, with its protective legal environment, strict directors’ liabilities, and relationship-driven dynamics.
How does the European credit universe compare against the United States?
While the United States still has the much larger credit market, Europe has grown significantly over the past decade. At the end of the first quarter of 2025, the value of outstanding European debt within a typical multi-asset credit universe totaled US$7.5 trillion. This combined market size has helped to support liquidity, even among many higher-yielding assets.
U.S. and European multi-asset credit universe (US$ trillion)
Although U.S. equities have outperformed European stock markets for more than a decade, home bias hasn’t typically paid off in credit markets; in fact, most types of European credit have outperformed their U.S. counterparts over 1-, 3-, 5-, and 10-year periods.¹
Market data shows that European loans have outperformed U.S. loans by 1.2% per year—or 19.5% cumulatively—over 10 years in U.S. dollar-hedged terms; this has compensated investors for their 1.0% higher volatility over the same period. Meanwhile, European high-yield corporate bonds outperformed by 0.6% per year (8.8% cumulatively) with 0.5% a year lower volatility over the same period.
It’s been a similar story in investment-grade corporate bonds, albeit to a lesser extent, where Europe has outperformed by 0.2% per year (2.9% cumulatively) with 1.9% lower volatility a year.¹
Although U.S. equities have outperformed European stock markets for more than a decade, home bias hasn’t typically paid off for U.S. investors in the credit markets.
For someone who invested US$10,000 10 years ago, that would mean an extra return of around US$1,950 from European loans, or approximately US$880 from European high-yield corporate bonds, compared with their U.S. equivalents.² Do note, however, that we’re referring to a hypothetical situation here, and it doesn’t represent actual trading, and past performance isn’t a guarantee of future outcomes.
We believe these superior risk-adjusted returns can be explained by a combination of higher spreads within alternative credit asset classes, better structural protection for creditors, and an institutional buyer base that has a longer-term investment horizon, which tends to have less sensitivity to short-term market movements.
European outperformance
Yearly relative return: Europe vs. U.S. (%)
Europe's favorable structural and legal characteristics
We would argue that one underlying reason for Europe’s attractive risk-adjusted returns is that its jurisdictions are among the most creditor friendly globally, with their legal frameworks and cultural norms playing a role in creating a consistently supportive environment for lenders.
Less aggressive restructuring tactics
Outside of Europe, an increasingly common practice among sub-investment-grade borrowers is to initiate liability management exercises (LMEs). These exercises effectively enable borrowers to unofficially restructure their debts, usually at the expense of existing lenders. LMEs aren’t a typical feature of European markets—there have been notable cases of judges ruling in favor of the original creditors in attempted LMEs in Europe, while the relationship-driven dynamics of European markets mean that borrowers, lenders, and consultants are hesitant to jeopardize potential future deals by using aggressive LME tactics in existing arrangements.
Incentives to avoid insolvency
Meanwhile, directors’ liabilities can be particularly strict in Europe. This incentivizes directors to avoid insolvency or use otherwise aggressive tactics that would be detrimental to creditors, which in turn can help to support reduced default rates and higher recovery rates.
Does a European bias always make sense?
Although European credit assets have consistently outperformed their U.S. peers, we wouldn’t advocate an automatic bias toward the region, not least because the past can’t reliably predict the future. Instead, we would argue that a flexible, multi-asset credit approach should look to exploit relative value opportunities between each region when potential opportunities present themselves through the market cycle.
"European credit markets continue to grow and adapt, which means the potential opportunity set is constantly evolving."
A good example would be in the loans market, where relative value between the United States and Europe has shifted over time. From 2013 to 2015, European loans offered prospectively higher returns, which came to fruition. This changed gradually toward late 2015, when the United States began to offer superior relative value, before reversing once again, with market returns favoring Europe since 2018.
Geographic value shifts over time
Return from loans: Europe vs. U.S. (May 2013–March 2025)
Managing credit risks
While the general characteristics of each market tell one part of the story, we believe that finding attractive risk-adjusted return opportunities within the global credit universe is ultimately driven by fundamental, bottom-up credit research. The breadth of the multi-asset credit universe, from corporate bonds to loans, convertibles, asset-backed securities, and financials, means this requires deep asset class specialization, a repeatable investment process, and an established, on-the-ground presence in both regions to possess the knowledge required to mitigate credit risks in each market and for each individual borrower.
What's the credit outlook for Europe?
European credit markets continue to grow and adapt, which means the potential opportunity set is constantly evolving. The region still experiences ongoing, negative investor sentiment toward its economic growth prospects; however, as we’ve seen, Europe has consistently benefited from superior relative value and typically better structural protection from a financial perspective.
While the market is already large enough to support high levels of liquidity, its relatively modest size compared with the United States means that even a marginal, sustained increase in investment flows to the region—either through improved sentiment or longer-term changes in asset allocations—may mean that the positive story in European credit continues.
1 Bloomberg, as of March 31, 2025. 2 ICE, Morgan Stanley, MCQS, as of March 31, 2025.
Important disclosures
Important disclosures
This material is for informational purposes only and is not intended as investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risks, including the possible loss of principal. References to specific asset classes, sectors, or markets are for illustrative purposes only and may not be representative of actual investments. All data is as of March 31, 2025, unless otherwise noted.
The Intercontinental Exchange Bank of America (ICE BofA) U.S. Corporate Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt in the U.S. domestic market. The ICE BofAML Euro Corporate Index tracks the performance of euro-denominated investment-grade corporate debt publicly issued in the eurobond or euro member domestic markets. The ICE BofAML European Currency High Yield Index tracks the performance of euro- and sterling-denominated below investment-grade corporate debt publicly issued in the eurobond, sterling domestic, or euro domestic markets, capping issuer exposure at 3%. The ICE BofA Contingent Capital Index tracks the performance of investment-grade and below investment-grade contingent capital debt publicly issued in the major domestic and eurobond markets. The Morningstar LSTA US Leveraged Loan Index tracks the performance of the market-weighted performance of U.S. dollar-denominated institutional leveraged loan portfolios. The Morningstar European Leveraged Loan Index is a market-value weighted multi-currency index designed to measure the performance of the European leveraged loan market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.
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