The corporate bond markets continue to demonstrate solid levels of issuance. In the first seven months of 2025, the US Investment Grade segment recorded approximately USD 1 trillion in new bonds, while Europe saw around EUR 400 billion in gross issuance. These figures are slightly higher than last year’s levels, particularly in Europe. However, these volumes have been well digested by investors, as net issuance has been significantly lower during the same period, approximately USD 300 million for the US and around 130 million for Europe. Among the largest bond transactions in 2025 so far were the USD 26 billion M&A-related refinancing by Mars (consumer) and the USD 20 billion issuance by Morgan Stanley (banking).
Typically, investors are attracted to the new issue market due to the premium offered on new bonds. This premium is influenced by several factors, including the prevailing market environment, investor risk appetite, the issuer's reputation and track record, and the size of the deal.
An analysis of new issue premiums over recent years reveals that the highest pick-ups occurred during periods of heightened market volatility, such as the onset of the Covid-19 pandemic in early 2020. Currently, premiums are at the lower end of the historical average but remain higher than the levels observed in early 2025 (see blue bars in Figure 1). In most cases, new bond issuances tend to generate alpha for investors, as spreads typically tighten post-issuance on average (see red bars in Figure 1).
What to expect going forward?
For 2025, investors can expect total US Investment Grade bond gross issuance to reach approximately USD 1.5 trillion. With around USD 1 trillion already issued by August, an estimated USD 500 billion is anticipated for the remaining months of the year. September is likely to see another period of robust new issuance activity.
Investor flows into corporate bond funds remain strong, driven by the ongoing search for yield in the current market environment. Monitoring the development of the new issue premium can serve as a valuable indicator of investor risk appetite in the months ahead. A below-average new issue premium is reasonable in the context of elevated equity valuations and the “risk-on” environment.
To capitalize on the performance potential of new bonds, we believe investors should remain active in the primary market. However, we deem it crucial to be selective and disciplined, as not all new issues are worthwhile, especially given the current environment of compressed premiums. In our view, the opportunities are still worth pursuing – but not at any price.
EUR credit spreads continued to tighten over the summer months. BBB-rated corporates are now trading near 10-year lows at approximately 88 bps OAS (option-adjusted spread), while A-rated bonds are only marginally wider at 69 basis points (bps) compared to their historic trough of 63 bps. Although single-A spreads remain slightly above their long-term averages, focusing solely on this segment is unlikely to generate sufficient carry to outperform. As a result, we are screening various areas of the market for better value.
Duration: staying in the belly of the curve
We see limited appeal in extending duration too far out the curve (20 years plus). Ongoing risks of steepening—driven by fiscal deficits and Dutch pension reforms1—warrant caution at the long end, in our view. Instead, we prefer the belly of the curve (6–10 years), where investors can still capture carry without taking on disproportionate interest-rate risk. This view differs slightly from that of our rates colleagues, who anticipate modest bull steepening of the German federal bonds curve (see Tariffs, trade and rising prices – a challenge for central banks by Daniel Karnaus).
Sectors: healthcare in focus
Healthcare has been in the spotlight following US tariff discussions under Section 232, which aim to reduce reliance on imported medicines and active ingredients. So far, the impact on credit markets has been limited. European healthcare bonds have modestly underperformed the broader Euro IG index year-to-date, with excess returns of 1.4% vs. 1.7%. Sector spreads remain tighter than the market overall, though less so than at the start of the year.
Large pharmaceutical issuers appear well insulated. Roche, for example, has highlighted its significant US presence and spare capacity that could absorb production if needed. Similarly, AstraZeneca has pointed to its diversified supply chains and the flexibility to shift production locally, while Lonza expects no material impact from US trade policy. The generics space, however, is more vulnerable. US trade advisor Peter Navarro has suggested that tariffs could disproportionately target this segment. Still, companies like Teva are partially shielded, with over half of its US sales already produced domestically. For now, these risks remain more of a headline concern than a driver of spreads. As such, we maintain a neutral stance on the sector.
Subordination: opportunities in hybrids
Corporate hybrids remain supported by strong technical factors, including tight supply, solid demand, and lingering short positions. The senior-hybrid basis (i.e., the spread differential between a senior unsecured bond and a call-date matched corporate hybrid from the same issuer) has, on average, compressed to approximately 100 bps OAS, down from 165 bps in April. Despite this compression, we continue to see relative value and maintain an overweight stance.
Earlier this year, we capitalized on attractive dislocations in short-call hybrids, which widened sharply during the April sell-off. Since that opportunity has largely played out, we have now shifted our focus to medium-call hybrids, favoring extension trades in core issuers with call dates out to 2030. Figure 2 shows the 6-month OAS change for different call maturities with the majority of opportunities located at the bottom-left (i.e., strongest spread tightening for short-call dates).
The bottom line
With spreads near historic lows for euro corporate bonds, alpha generation requires selective positioning. We see the best opportunities in the belly of the curve, remain watchful but balanced on healthcare, and continue to favor corporate hybrids as a source of carry and relative value.
1. As Dutch pension funds move from defined benefit to defined contribution schemes, they are expected to sell large amounts of long-dated euro government bonds. With less demand at the long end of the market and governments issuing more debt, this shift could push long-term yields higher and steepen the curve.
