CONTRIBUTORS
David Zahn
Head of European Fixed Income
Emmanuel Teissier
Director Corporate Credit Research Europe
A cautious starting point
Our starting point is constructive on fundamentals but explicitly cautious on the near term. While fundamentals remain solid and yields are high by historical standards, spreads are relatively tight—around +97 basis points with a yield to worst near 3.71%—and leave limited room for disappointment. The sector is therefore not immune to episodes of volatility; any such episode could push spreads materially wider. We set out this stance up front, so readers understand both the appeal and the fragility of the market today. For investors of all kinds, the practical appeal is simple. Euro IG offers meaningful income relative to cash and many traditional savings options while remaining anchored in higher credit quality. That combination can make the asset class a useful defensive income sleeve in a multi asset allocation, provided investors accept the potential for episodic volatility and avoid chasing yield into lower rated credit.
Investment-grade corporate bonds have consistently offered a yield premium over government bonds, as illustrated by the persistent gap between euro IG corporate yields and core sovereign curves in the chart below. While government bonds remain an important benchmark, they may understate the income potential available in credit markets. In particular, euro investment-grade corporates have provided higher yields across market cycles, reflecting the additional spread earned for credit risk. In today’s environment—where yields remain elevated relative to recent history—this carry advantage continues to support portfolio income and diversification, even as markets experience periods of volatility.
Bloomberg Euro-Aggregate: Corporate Index vs. Five-Year Government Bonds
Source: Bloomberg as of 31 March 2026. Past performance is not a guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
Breadth helps when the map is changing
The euro IG universe is broad: utilities, financials, industrials and more, including international issuers looking to diversify their source of funding and increase their investor base. In a world of tariffs, sector disruption and political fragmentation, that breadth reduces concentration risk and helps avoid overreliance on any single market or theme. Our research highlights utilities as a relatively wide and defensive sector and suggests a selective stance on financials, while remaining cautious on lower quality pockets.
If markets are a highway, duration is the speed at which you travel. In a higher-for-longer rate environment we prefer a sensible speed—enough duration to capture income but not so much that a sudden rise in yields leaves investors exposed. Our research identifies the 4-to-7 year area as a pragmatic sweet spot, and we favour moving up in credit quality rather than stretching for yield into lower rated debt. That combination aims to deliver income while limiting downside should volatility spike.
What keeps us awake at night, and what we watch for
The clearest downside scenarios start with energy—sustained higher oil or gas prices could reaccelerate inflation and complicate the European Central Bank’s (ECB’s) path, putting upward pressure on yields and widening spreads. Technicals also matter; weaker demand or forced selling driven by strains in private credit could amplify moves in public markets. Because spreads are not particularly wide today, the market has limited buffer; any disappointment could translate quickly into meaningful spread widening. We monitor these risks closely and size exposures so that portfolios are resilient across adverse scenarios. We are explicit that a move to materially wider spreads would be an unwelcome near-term development. At the same time, widening would probably create attractive opportunities for patient investors if issuer fundamentals remain sound. In practice, that means we remain defensive today but keep the capacity to add high quality euro IG at better entry levels should dislocations offer compelling value.
But bottom line, euro investment grade today feels like a well-built shelter in a storm: not immune to every gust, but engineered to withstand significant stress while still offering useful shelter. For investors who want income but do not want to chase lower-quality credit or take on unnecessary rate risk, a disciplined, research-led approach that emphasises balance-sheet strength, measured duration and active flexibility is a pragmatic choice. Concrete guidance from our research—a quality tilt, a focus on utilities and selective financials, and a preference for the 4–7 year zone—translates into clear portfolio actions rather than abstract slogans.
Active ETF: nimble rather than passive
An active ETF structure offers flexibility to respond as market conditions evolve. Such approaches typically draw on a combination of macroeconomic views, fundamental analysis and quantitative insights to identify relative value opportunities and adapt to technical dislocations. The ability to adjust exposures across sectors, issuers and maturities can be advantageous when technical support weakens or when spreads appear misaligned with underlying risks.
Source: Franklin Templeton Fixed Income Research, 31 March 2026
DEFINITIONS
Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract. It is a type of yield that is referenced when a bond has provisions that would allow the issuer to close it out before it matures. YTW helps investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios.
Duration measures how sensitive a bond’s price is to changes in interest rates. It is usually expressed in years and estimates how much a bond’s value will rise or fall when rates change.
Spread (Yield Spread) A spread is the difference between the yield of one bond and the yield of another (often a government bond used as a benchmark).
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
For actively managed ETFs, the portfolio manager does not attempt to keep the portfolio structure or performance consistent with any designated index, and during times of market rallies the portfolio may not perform as well as other portfolios that seek to outperform an index. Performance of a passive portfolio may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors.