How euro corporate bonds offer stability in volatile markets

Against a backdrop of artificial intelligence (AI) bubble fears, elevated fiscal deficits, a weak eurozone economy, and ongoing political uncertainty, financial markets are likely to experience bouts of volatility. However, investors may find some stability in European investment‑grade corporate bonds. In a risk‑off scenario, the duration and credit spread components may offset each other. We believe this defensive attribute, together with an attractive return potential, makes the asset class an appealing investment choice in today’s uncertain market environment.

Best of both worlds

We believe that the components of duration and credit spread in European investment‑grade corporate bonds offer the best of both worlds. In good times when the economy is growing and credit spreads are tightening, the asset class typically does well thanks to the credit element. By contrast, when times are tougher and the economy is weakening, the duration component may kick in as a shock absorber to help offset a widening of credit spreads.

A good example of this in action was during the tariff‑fueled market rout of April 2025. Yes, credit spreads widened, but this was balanced by the fall in government bond yields, which helped stabilize returns (see Figure 1). As a result, the asset class experienced a maximum drawdown of just 1.6% compared with 3% for eurozone sovereigns and 18.2% for European equities.¹ This demonstrates the asset class’s defensive characteristics—a very powerful benefit, in our view, especially given the current climate of market and economic headwinds.

Shock absorber role

An often‑overlooked quality of the European corporate bond market is its breadth and diversity. The asset class spans 18 industries and over 900 companies across more than 25 countries, including those outside Europe that issue bonds in euros, such as the U.S., the UK, and Japan. It is vast, with the potential to diversify opportunities, as well as to act as a potential performance cushion at times of uncertainty. An interesting observation from the French political turmoil in 2025 was that the contagion to corporate bonds was kept fairly contained. This ability to dampen political risk is encouraging and will likely continue to matter as the situation in France remains uncertain and there’s growing unease over the financing of large fiscal deficits in Europe.

Turning to economic conditions, U.S. tariffs are expected to present a headwind for the eurozone economy in 2026. This means that, alongside political uncertainty and continued geopolitical tensions, volatility may increase. But European corporate bonds are supported by their high credit quality. As of the end of September 30, 2025, the average credit quality of the benchmark was A‑,² which is higher than the rating of some eurozone countries.

Furthermore, a key aspect of the market is its duration profile, which is currently around 4.4 years.³ This means there is potential for European investment‑grade corporate bonds to benefit if economic data worsen and that leads to another interest rate cut from the European Central Bank. At the very least, the duration component could help to act as a shock absorber in the event of a risk‑off move that leads to credit spreads widening.

AI debt funding—less of a concern for Europe  

There is currently significant attention on AI debt funding within investment‑grade markets. Leading AI firms, facing multibillion‑dollar capital expenditure programs, are expected to increasingly tap public debt markets for financing going forward. While these companies generally have low leverage, there are concerns about their valuations and the potential impact that a surge in new bond issuance could have on investment‑grade corporate bond markets. Since most of this activity is expected to be concentrated in U.S. markets, it is less of a concern for Europe.

Balance of income and stability

Despite tight credit spreads, European corporate bonds continue to offer investors a potential compelling long‑term income‑generating opportunity. As of the end of September 2025, the average yield on offer in European investment grade was around 3.09%—which is well above the average level of around 1% observed in the last decade.⁴ In all, we believe that European corporate bonds offer investors a good balance of compelling income and portfolio stability. But active management and skilled security selection powered by in‑depth fundamental research is imperative in the current climate of macro and political risks.