Wider spreads and belly bid in sight as corporate bond market resets for 2026

Europe’s high grade corporate bond market roared through 2025, printing record volumes at tight spreads even as the risks rolled by from US tariff policy, France’s ratings wobble and conflicts in Ukraine and the Middle East.

Corporate borrowers had issued €370.8bn of syndicated benchmark bonds by November 21, up 10% from the same period in 2024, according to GlobalCapital’s Primary Market Monitor.

Despite the higher volume, the new issue premium issuers paid has been a fraction of the amount offered a year ago, averaging 1.4bp compared with 5bp in 2024, PMM shows.

“What has impressed me throughout this year is the depth of liquidity in the euro markets and its ability to absorb peaks in supply,” says James Cunniffe, head of corporate and structured debt syndicate at HSBC in London.

“November has been incredibly busy in the euro IG market with the second busiest week on record, but deals continue to be well covered, pricing with minimal concessions,” he notes. “The market has demonstrated its ability to take down spikes in supply without repricing.”

Yields have remained high enough and, with rates broadly steady into the year end, euro IG funds have kept attracting cash inflows, meaning solid orderbooks that have pushed curves tighter even for a heavy amount of issuance. However, market participants expect wider spreads and intermediate tenors to be features of 2026’s deals.

Three quarters of respondents to GlobalCapital’s corporate bond market survey expect spreads to widen as compensation for interest rate cuts and a more unsettled macroeconomic environment, while 17% think they will remain unchanged and only 8% believe they will tighten.

Investors say yields of 3%-3.5% are attractive, given liquidity, diversification and the average rating in Europe’s bond market versus the US, but if they fell towards 2.5%, they might reassess.

“Global economic growth looks gloomy at the moment, and I don’t expect much positive news going into next year,” says a senior portfolio manager in London. “Tariffs’ impact on major economies may also bite later — through higher prices or softer demand — so we need to monitor closely.”

For those who expect spreads will tighten, Giulio Baratta, global co-head of IG finance at BNP Paribas, foresees a constructive and stable credit backdrop. “We expect spreads to be flat to slightly tighter in Europe and modestly tighter in the US,” he says. “Term rates, especially in the mid maturities, should be broadly stable.”

“Spreads are tight, but fundamentals are strong and fund flows have been robust this year,” says Jack Daley, portfolio manager at TwentyFour Asset Management. “Net supply may be near €200bn; flows into European IG and aggregate have been about €100bn-€150bn, and coupon cash-backs add roughly €30bn a year.”

He notes that a supportive technical backdrop could also underpin spread tightening. “If growth holds and inflation trends toward targets, new tights are possible,” he adds. “All-in yields and an upward rate curve help anchor spreads.”

Issuance is expected to grow by most survey respondents, with 58% expecting a rise, while 25% believe volumes will be flat and only 17% expect a decline.

Some point to M&A activity driving jumbo deals next year. “The Street now points to 2026 as the more active year for M&A,” says Baratta. “Our acquisition financing pipeline and the news flow clearly show a marked increase in M&A momentum. As a consequence, we expect 2026 to be at least as busy as 2025 when it comes to net corporate bond issuance.”

M&A financing is underway. L’Oréal, for example, raised €3bn in a three-part deal in November to finance its biggest M&A deal, the acquisition of Kering’s beauty business for €4bn.

Others think large capex programmes, led by AI and data centre infrastructure projects, will be the major driver. Alphabet, for example, printed €6.5bn in November to accelerate its AI and cloud infrastructure programme.

Foxconn, the Taiwanese electronics manufacturer, made an impressive debut in late October, raising €650m to fulfil its plan of shifting its business toward AI hardware.

“The tech sector is very underrepresented by local names in Europe and repeat deals from US names like Alphabet are an additive to European supply,” says Cunniffe. “The overwhelming market response shows that these names offer euro investors the opportunity to diversify their euro portfolios into hyperscalers.”

Reverse Yankees have also been a hot and not unrelated topic this year, with a flood of issuance into Europe. Alphabet raised a total of €13.25bn this year in euros, while Verizon and NextEra’s debut jumbo hybrids wowed the market in the first week of November, one of the busiest weeks of the year for Europe’s IG corporate market.

“We continue to see an increase in Reverse Yankee supply across the euro market as a complementary source of funding at competitive funding terms,” says Cunniffe.

US companies partly bring euro issuance to take advantage of lower rates. “When comparing the 10-year US Treasury to euro mid-swaps, it’s almost 140bp higher,” adds Cunniffe. “And for those with net investment hedge capacity, issuing in euros remains a compelling argument.”

Of survey respondents, 45% think Reverse Yankee issuance in 2026 will remain unchanged. Meanwhile, 27.5% expect it will be higher and the same share predict a decrease.

After a spate of long dated issuance at the start of the year, the belly of the curve proved the sweet spot in the end.

This is predicted to remain the case. An overwhelming 75% of respondents chose the five to 10-year sector as the most popular for the coming year. Meanwhile, 17% voted for the maturities up to five years, while 8% think 10-15 year tenors will prevail.

“In 2025 investors reached for yield and bought more seven and 10-year paper, and even longer in large Reverse Yankees. With the German curve normalising and credit curves relatively flat, investors are comfortable going longer,” says Daley. “If conditions stay stable, we expect more seven to 10 year issuance in 2026. In risk-off periods tenor likely gravitates back toward five years.”

The European IG corporate bond market has been roaring all year, pricing tight on big order books, but cracks appeared in October after fresh updates on First Brands’ bankruptcy raised questions about banks’ exposures, while a lengthy US federal government shutdown added further uncertainty.

Issuers paid higher premiums and orderbook attrition rose across the asset class. Even though the market regained strength quickly, some participants see it as a wake-up call.

Half of survey respondents identified worsening global macroeconomic conditions as the biggest risk for corporate issuers in 2026, while 25% chose geopolitical uncertainty.

Lower investor confidence, weaker consumer confidence and an AI bubble bursting shared the remaining votes, with each drawing about 8% of responses.

“The main risk for corporate borrowers is slower growth or recession, possibly alongside supply chain or tariff shocks that keep inflation sticky and raise the stagflation risk. A focus on sovereign debt-to-GDP concerns could return,” Daley notes.

“The impact of rate cuts depends on the reason,” he adds. “Cuts driven by weaker growth and higher unemployment would likely widen spreads. Cuts driven by inflation returning to or below target with stable growth could see spreads hold or tighten.”

Slow economic growth and tariff risk are set to linger into 2026. The European Commission and International Monetary Fund predict euro area growth in the low 1% range in 2025-26.

At the same time, fresh US tariff threats, including levies on autos, have darkened the outlook for discretionary goods, and the auto sector is bracing for more bankruptcies in the wake of First Brands.

Against that backdrop, 42% of respondents pick consumer retail as the most problematic sector going into 2026. Autos follow with 25% of votes, then industrials with 17%. Real estate and chemicals each draw 8% in the poll.