High Yield Bonds: Euro-Denominated Ones Remain Strong, but Something’s Changing
Monetary policy dynamics also have an impact on the High Yield bond market. Let’s take a look at how USD- and EUR-denominated High Yield bonds are performing.
High Yield bonds (low-rated, high-yielding corporate debt) are strongly influenced by central bank monetary policy and by currency movements—particularly the US dollar. In general, a low or declining interest rate environment supports High Yield bonds: capital becomes cheaper, refinancing risks decrease, and investors, in search of yield, shift funds toward riskier segments like High Yield. As a result, bond prices rise and credit spreads tighten.
Conversely, a tightening monetary policy (rising rates) tends to weigh on the High Yield segment. It increases refinancing costs for heavily indebted companies and encourages investors to shift toward safer assets, such as government bonds. This can lead to falling prices and widening credit spreads.
Currency movements also play a role. If the dollar strengthens, USD-denominated High Yield bonds become more attractive to foreign investors (at equal credit risk), but they can burden companies with foreign currency debt. Conversely, a weaker dollar can support local currency issuance and favor international High Yield, especially in emerging markets.
The chart above shows the strength ratio between USD-denominated and EUR-denominated High Yield bonds. It highlights a long downward trend starting in mid-2024 and reaching a low in April. Since then, the strength of the EUR-denominated segment has eased, with a short-term upward trend favoring USD High Yield.
This shift is also linked to diverging monetary policy paths on both sides of the Atlantic. In Europe, rate cuts have been more aggressive, accompanied by unusual dollar weakness. In the US, inflation concerns delayed Fed action, but in recent weeks, expectations of rate cuts have strengthened again—supported by positive economic signals.
