Deal selection critical as credit shrugs off Iran conflict

Credit markets have been remarkably resilient in the face of significant geopolitical and macroeconomic volatility in recent weeks.

European high yield (HY) spreads at the index level now sit at around 278bp, roughly 12bp tighter than before the onset of the Iran war, having widened to a peak of around 350bp in late March (though they remain above the 2026 low of 263bp).

From a fundamental perspective you could argue that with Brent crude oil prices around 75% higher than they were at the beginning of the year, and a supposed “deal” between the US and Iran yet to materialise, the optimism being displayed in credit and risk markets generally is, if not misplaced, then at least a little stretched. We think there is validity to this argument, particularly given the inherent negative convexity in credit (there is greater scope for spread widening if the situation deteriorates than there is upside if a deal is reached)  and the fact that markets are generally not very good at pricing geopolitical tail risks.

However, we also think that absent a move in Brent towards and above $150 per barrel, we are unlikely to see demand destruction of a magnitude consistent with a recession, nor are we likely to see a material increase in defaults. In fact, downward revisions to growth have not been overly pessimistic at this stage, with Bloomberg consensus growth for 2026 about 30bp lower for the US, the Eurozone and the UK. In the meantime, corporate earnings have continued to show resilience, as evidenced by a Q1 results season that did not bring many negative surprises or a pessimistic tone from management teams in response to the war.

So, the current status quo of “deal no deal” is fine for markets as long as there is no escalation, even if a resolution takes longer than expected, because a slow but positive growth environment is typically not a bad one for credit.

And while the fundamental picture remains resilient, the bid for yield endures. The last few months has seen record amounts of issuance across investment grade, driven mainly by AI-related infrastructure funding. The increase in net supply has however been easily absorbed by the market as flows remain positive and fund managers remain defensively positioned.

Defensive positioning has not stopped investors from dipping their toes down the quality spectrum in recent weeks though. After a relatively cautious March, April brought record issuance in European HY of around €15bn, while May also looks like it will be a busy month for primary. We have seen an uptick in single-B issuance in particular after decent spread outperformance since the March wides (single-B spreads are 10bp inside their late February 27 levels versus 9bp wider across BBs).  

Much of these were refinancings, including the long-awaited return of the European chemicals giant Ineos, which increased an initial €400m 5.5-year non-call two-year (5.5NC2) deal to €700m and priced 62.5bp inside initial price thoughts (IPTs) at 7.875%, and French lab company Biogroup which priced €1.3bn of 5.25NC2 paper at 7.75%.

Atos, the French IT group that restructured in 2024, is also back in the market refinancing the debt put in place for its restructuring with a 5NC2 deal launched at IPTs of low 8% area on Tuesday, while net new supply has been provided by Carlyle with a €1.25bn seven-year non-call three secured note to help fund its carve-out of BASF’s coating business. IPTs for the latter were initially in the low 7% area before the bond was priced at 6.5%, with the order book across the bonds and loans reaching approximately €14bn (just under four times oversubscribed).

It is worth highlighting that performance across these names has generally been sluggish in early secondary trading given the tightening from IPTs and (in our view) limited new issue premium on offer. But it shows the market is willing to fund “storied” credits even through a volatile macro environment.

We approach these lower rated issues with a healthy degree of scepticism and remain of the view that this is an environment to be highly selective. With spreads having erased their March widening and tightened further, selectivity can be crucial in avoiding the “accidents” that can occur amid such optimism, both in terms of sectors and individual names.

That is not to say that we don’t see interesting deals across the quality spectrum, including from single-B issuers, but it means that we underwrite not just through the base case but also through the stress case. When tail risks are elevated, this is critical, and most importantly, can help drive conviction in returns through periods of volatility.