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Positive year-to-date credit excess returns in 2026
Year-to-date, EUR and USD credit has delivered positive excess returns over government bonds. This reflects spread tightening, mainly in EUR credit, due to strong demand for all-in yields. Low default rates, benign default forecasts and low recession probabilities support credit. Moreover, markets do not yet view the recent oil-price increase as a broad, deep or lasting credit event, even though it has lifted inflation expectations and government bond yields. EUR credit has outperformed USD credit year-to-date. USD IG was weighed down by large volumes of long-dated AI-related bond supply, while the AI scare around software companies affected USD HY spreads. Credit has also delivered positive total returns year-to-date in both IG and HY, as rising yields were more than offset by the return on the credit spread component. Given tight spreads versus government bonds, further tightening potential looks limited. However, the technical and fundamental picture remains supportive, so we stay neutral on IG and USD HY credit. We expect wider EUR HY spreads, given tighter valuations. Regarding government bonds, the front end of the curve may rally more strongly in Europe than in the US, as markets appear to overprice ECB tightening. For August, we expect lower 2-year and 10-year government bond yields in the US and eurozone, while remaining neutral on Switzerland.
