Junk Bonds Are Europe’s Next Big Thing. It’s a Goldilocks Moment.

Global metal-processing specialist Benteler recently placed paper at more than 7% annual interest. (Courtesy BENTELER)

A surge in European equities has been the global market’s surprise of 2025. Now comes corporate bonds’ turn, specifically high-yield bonds.

Junk issuance in the European Union smashed records in June as investors gobbled up 23 billion euros ($27 billion) in subinvestment-grade corporate paper. “In our global high-yield fund, we are overweight Europe,” says Mark Remington, lead high-yield portfolio manager at EFG Asset Management.

Europe remains a small junk-bond fish, with around $350 billion in total issuance, compared with $1.5 trillion in the U.S., says Jamie Harding, portfolio manager for European credit at AllianceBernstein. The market has hit a Goldilocks range that suits both borrowers and investors, though. “Spreads are tight, but yields are attractive,” he says.

Average gross yields below 5.5% lag behind the 7% available in U.S. high yield, notes Catherine Braganza, senior portfolio manager at Insight Investment. But with U.S. interest rates more than two percentage points higher than in the euro area, the alchemy of hedging can make up the difference.

“When you hedge back to dollars, Europe looks cheap,” Remington asserts.

European junk on average is safer, too. Two-thirds of the market is rated BB, the upper limit of high yield, compared with half in the U.S., Braganza says. Market exuberance has also opened the door for higher risk/reward credits, adds Ian Bates, senior vice president for European high yield at Neuberger Berman.

Austrian auto parts manufacturer Benteler International (rating BB-) and U.K.-based Punch Pubs (B-) both recently placed paper at more than 7% annual interest. “We are overweight in the single-B names relative to our benchmark,” Bates reports.

European high-yield offerings are diverse, with no single sector accounting for more than 10% of the market. In the U.S., volatile energy companies make up 15% of volume.

Most European issuers are domestic-facing, Braganza adds, minimizing exposure to Donald Trump’s threatened U.S. tariffs. “We own the bonds of a tin can manufacturer that sells its cans to a Heineken brewery next door,” she says, by way of example. “The BB credits tend to be very local.”

Auto makers, the most exposed business to a trans-Atlantic trade war, represent around 10% of the European market.

That doesn’t mean Goldilocks conditions can last forever. Too much appetite from the market could drive yields below investors’ sweet spot. “We have generally balked around 5%,” Braganza says.

Spreads have shrunk to just 50 or so basis points (0.5%) wide of historic lows, EFG’s Remington adds. That reflects benign macro assumptions that various events could shake: the U.S. president pushing harder than expected, Germany’s revival falling short, or Russian aggression spilling over from Ukraine, among others.

Moscow’s 2022 invasion of Ukraine shrank the European high-yield market by a quarter as investors demanded higher risk premiums than issuers could afford. It’s recovering part of that ground slowly now. “It wouldn’t take much for the market to break again,” Remington says. “If spreads get wider again, the market can close.”

For now, though, investors see Trump’s policy kaleidoscope counterintuitively threatening U.S. market dominance, while provoking Europe into needed fiscal stimulus, if not structural reform.

“We see the client base diversifying away from the U.S. to Europe, where they have been underweight since 2022,” Neuberger Berman’s Bates says.

After the inevitable break for August, he sees the Eurojunk party continuing for a while.

“We know the banks have relatively robust pipelines for issuance,” Bates says.