European credit markets have shortened significantly over the last three years. According to Muzinich & Co., high-yield companies have kept older, low-coupon bonds outstanding while issuing shorter-dated bonds during periods of elevated funding costs. Meanwhile, falling prices for longer-dated bonds have reduced their market share, making European corporate bond markets notably shorter than in late 2021.
Shorter duration markets are supportive of tighter spreads, the asset manager points out. “If the theme of tighter spreads were to continue in 2025 and duration-adjusted spreads reach the tights seen in 2017, we estimate this could generate around 2% of excess return in single-As and BBBs,” says Portfolio Manager Ian Horn and explains that this is calculated by multiplying the implied spread tightening Muzinich identified by current market durations.
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