Only Trump can play Trumpism. The unveiling of U.S. trade tariffs by President Trump on April 2—a moment dubbed "Liberation Day"—triggered a classic credit market reaction in both the U.S. and Europe. While U.S. Treasuries followed their own path, shaped more by waning investor confidence in U.S. assets, credit markets responded to the shift in growth expectations: spreads widened meaningfully across both investment grade (IG) and high yield (HY). The initial widening was partially reversed by a temporary reprieve: on April 9, a 90-day suspension of all tariffs above 10% (excluding those for China) was announced. Subsequent statements from the U.S. Administration aiming to clarify uncertainties around specific sectors, helped stabilize sentiment. European credit markets rebounded, with spreads in IG tightening from 125 bps and HY narrowing from peaks of 430 bps. The sell-off that dominated the week following April 2 was largely mitigated, and credit spreads began to re-compress. Both movements -upward and downward- were entirely rational. The iTraxx Crossover index, which had been inside 300 bps in mid-March, surged to 430 bps before retracing to around 340 bps. After a brief pause, the European HY bond primary market reopened post-Easter, led by Lottomatica (Italian gaming Ba2/BB), a well-regarded issuer with strong cash flow production and contained leverage. The company upsized its proposed deal and priced its 2031 NC2 notes well inside initial price talk. This set the tone for other borrowers across the sub-investment grade rating spectrum to tap the market, refinancing near-term maturities. The different industrial sectors offered a broad range of opportunities and investment alternatives, supported by solid investor demand. The B3/B- companies needed more convincing points regarding earnings and docs changes for attracting the money which remained on the side for low corporate ratings during the month of April in the secondary market. Cirsa, the Spanish gaming and leisure operator (B2/B+), surprised the market with the successful placement of a €600 million PIK toggle bond 5NC1—an outcome that few would have anticipated just two weeks ago, given both the size and pricing considerations. Strong earnings momentum and large EBITDA margin helped reassure investors, who are further supported in their analysis by the likelihood of a near-term liquidity event, either through an IPO or a sale to another private equity sponsor. Disregarding ESG concerns (noting that Lottomatica’s recent bond was also significantly oversubscribed), I found the Cirsa transaction more compelling than the tight Stada SSNs or the IPL Plastics issue because this latest borrower operates in a more structurally challenged sector with elevated leverage metrics. It’s also worth highlighting that Cirsa was able to launch the deal just ahead of a long weekend and a national holiday in Spain—an indication of the strong appetite and reliability of the high-yield investor base outside the Iberian Peninsula (or, put another way, the chronic shortage of it in Spain. This strikes me as a conundrum). Another bond quietly placed by Deutsche Bank with a select few, as usual. It is important to know the history of the previous 2025 PIK and put it in the actual context. Meanwhile, the European leveraged loan market remained subdued, as fixed-rate bonds continued to be the preferred and more cost-effective option, instead of loans at 400–450 bps above Euribor. The Morningstar ELLI Index, which peaked at 98.70 in late February, now sits close to 96.80 (lows around 95.50 on April 9). The liquid loans in Europe struggled to recover from the complicated credit backdrop, while the private debt tried to fill the gap left from public syndicated deals that prevailed in the bullish market for several months. The European loan market drifted into lethargy as the CLO machine ground to a halt (discovering mode if you like it better). We know this correlation very well at this point. There’s little need to quote Charlotte Brontë—_“Life is so constructed, that the event does not, cannot, will not match the expectation”_—to understand the disconnect between macro expectations and market reality. I stand by my previous views: unprecedented policy uncertainty remains a defining feature of today’s market environment. **1. Temporary Relief or Structural Resolution** The 90-day tariff reprieve does little to address the deeper structural changes shaping markets. While progress in trade negotiations could support risk sentiment, in many sectors—particularly those vulnerable to geopolitical retaliation—uncertainty remains high. The return of wider spreads and premium does not require a full crisis or a recession; even incremental erosion in investor confidence may be sufficient to reprice risk. An updated macro view, driven by a decline in consumer spending and low production levels and investments from the companies, should imply a bearish environment of spreads around 425/450 bps. This is not the end of the world, but a return to where we were trading in Q2 2023. The tight credit environment of late 2023 and early 2024, driven by low volatility, steady inflows, and a perceived absence of negative catalysts, was inherently fragile. After a strong technical rally that lasted for two years from the 2022 fixed income disaster, valuations in 2025 became stretched. A correction from yields priced for a Goldilocks scenario was inevitable—and overdue. In my view, spreads are likely to continue drifting wider through the remainder of 2025, with potential relief only coming from a pivot in central bank policy (next round of money printing). **2. Slowing Growth and Investor Fatigue** European growth is slowing, increasing pressure on the ECB to continue cutting rates. A lower Euribor base and, consequently, reduced all-in yields—could prompt investors to reallocate portfolios, especially those who have been reaching for yield over the past two years. In bearish markets, credit spreads—rather than nominal yields—become the primary focus. After nearly two years of relentless inflows, investor fatigue is emerging and risks seem tilted against credit portfolios. While some argue that default rates will remain below long-term averages and that yields sufficiently compensate for risks, a key question remains: what is the target IRR for the portfolio net of impairments? Is it in line with the initial assumptions when the pool was acquired? When I speak with investors, I rarely receive straightforward answers. On the same line I don’t get answers why investors were accepting to be paid much less than normal to go down the credit curve, for example in SUNs. I remain unconvinced by arguments justifying current valuations. Europe’s credit market correction, thus far, YTD, represents only half the adjustment seen in the U.S. and the European economy appears to be weaker. It is prudent to brace for more downside volatility. The volatility could settle lower than levels reached during the first week of April (the highest value on the index since the Covid outbreak), but the credit spreads should go wider. **3. Idiosyncratic Risk Is Rising, not yet Systemic (for now)** As global growth concerns mount, the cracks in overly levered European corporates are becoming more visible. The rising tide is no longer lifting all boats. Many issuers—particularly those with negative free cash flow and aggressive capital structures—will struggle in this environment. The risk of losses is especially high among “zombie” companies and those which have pursued creative liability management exercises (LMEs), such as Opco/Holdco structures or used PIK toggle instruments. Investors who remain exposed to these names—or continue to rely on hope over analysis—may face further impairments. The credit’s resilience for some companies is weakening as operating performance deteriorate pressuring cash flows and available liquidity. **4. Opportunities Amid Dislocation** That said, market dislocations offer opportunities. Today’s environment may be more favorable for long-term investors than periods of compressed spreads and excessive optimism. The challenge is discipline: when spreads tighten and indices rally, it’s tempting to follow the herd. But I’ve long criticized this approach of investing looking at benchmarks—one focused on price action over credit fundamentals (or, in another way, cognitive of price dynamics but not of credit quality). Instead, investors should consider deploying capital incrementally as markets weaken, maintaining capacity for tactical additions on days of extreme volatility. The portfolio managers should use rallies to rebalance risks. This is a fundamentally different strategy than simply “tilting up in quality” or “staying conservative”. The ability to distinguish between temporary dislocations and structurally impaired businesses remains critical (I insisted on this point on the previous post, as I see some business models seriously broken by new and different consumers choices and the new challenges brought by AI). The credit cycle is probably maturing( even if don’t like this definition), and while risks are rising, so too are opportunities for selective, fundamentals-driven investors. The period of easy returns, driven by technicals and liquidity, appears to be behind us. I warned about this at the beginning of the year. Navigating this phase requires a shift in mindset: from chasing yield to managing risk-adjusted returns with patience, rigor and flexibility. This is the job of credit portfolio managers in the liquid markets who operate with mark to market rules. The shift is having thoughtful conversations around all the different options available rather than pushing into questionable positions and transactions with the unique goal of increasing the return on investments. These insights primarily apply to European markets. In contrast, dollar-denominated assets face a tougher bid from international buyers, as FX dollar weakness erodes the value of any spread premium. A 50–100 bps pick-up in U.S. credits can quickly be offset by a 10% loss on the currency in the main crosses. I observed big losses in European portfolios allocations where half of the investments were done in the U.S. not hedged. As I had the opportunity to discuss the performance with some clients, it is probably the right moment to think of US assets not in isolation, but in relation to their function in a global portfolio. The US risk is priced inconsistently in European portfolios and I don’t get the reasons why overseas investors kept many dollar assets in the allocations at the beginning of the year. **5. Structured products** Recent policy uncertainty and market turbulence have impacted the asset-backed securities (ABS) market, leading to a widening of spreads across both investment-grade (IG) tranches and mezzanine portions of capital structures. The most pronounced repricing has occurred in the collateralized loan obligation (CLO) segment, where the weighted average cost of capital (WACC) has widened by 45–50 basis points compared to pre-volatility levels. As a result, CLO WACC yields have reverted to their April/May 2024 range of 225–235 basis points. On a more positive note, the repricing trend on the asset side has largely stabilized. In the secondary market, many loans are now trading at implied margins of 400–415 basis points over Euribor, which supports arbitrage dynamics and enhances potential equity returns for CLO structures (if defaults remain under control and/or PMs clean steadily their portfolios from underperforming credits). Despite recent volatility, the ABS market remains fundamentally healthy and continues to offer attractive risk/return characteristics. While not purely diversification tools—as evidenced in April when broader fixed income experienced a widespread sell-off—ABS instruments bring unique features to portfolios. These include differentiated exposure to market liquidity, carry, duration, convexity, correlation profiles, and underlying assets. In CLOs it is even possible to diversify across manager size, style, and value creation approach. These characteristics should merit closer examination by a broad spectrum of investors. Some credit platforms, on their side, should revisit the asset class or promote it better through LPs. Securitized products continue to demonstrate strong value propositions for a wide range of institutions and pockets of money—from conservative banks and insurers to more opportunistic hedge funds. Strategic investments in securitizations have the potential to generate additional value to all portfolios due to the points mentioned above. Meanwhile, European regulators are still exploring ways to further support and promote the securitizations. Nevertheless, some market participants remain hesitant, viewing the sector as underwhelming despite compelling fundamentals. The indecision stems not from market volatility and spreads movements, but from an outdated mindset about financial markets and low/limited knowledge how ABS assets work.

Investment Quandary