European Credit Mid-Year Outlook: Glass Half Full

Research evidence excerpt

European Credit Mid-Year Outlook: Glass Half Full

M O R G A N S T A N L E Y R E S E A R C H

2026 European Credit Mid-Year Outlook: Glass Half Full

May 2026

Executive Summary | Key Positioning Views

Waiting for a better entry point

• In our base case, geopolitical uncertainty and tight spreads limit the beta upside. We see EUR IG spreads settling at

80bp, leading to ~1% excess returns and 7% total returns. We modestly lift our EUR HY spread target to 300bp, as

slowing growth and more restrictive policy put greater pressure on distressed tails and default rates.

IG – BBBs > As; Barbell 3-5y with the long-end

• BBBs offer the best vol-adjusted carry across IG, in our view, while higher rated cohorts are more exposed to

continued supply pressures. We think 3-5y bonds should benefit from continued demand and screen relatively cheap

versus longer dated bonds. We provide screens for investors to move from the belly of the curve into barbells of 3-5y

and 15y+ cohorts, with both offering better relative value.

Sectors – overweight energy, banks, healthcare, telecoms; cautious on cyclicals, particularly autos

• Banks’ fundamental strength has helped its outperformance amid the macro tailwinds, and we expect this resilience

to continue. We also continue to see more value in the energy sector, which has lagged the rally in energy prices. We

see autos as more exposed to further bouts of volatility, with weak fundamentals and limited risk premiums in the

sector. We think AI disruption concerns can continue to drive dispersion and discuss the theme in more detail.

HY – we reverse our down-in-quality call; prefer fin subs and loans instead

• HY fundamentals have been resilient and headline yields could keep demand technicals supportive, particularly in