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Euro IG corporate spreads have room to tighten
Summary Euro IG corporate spreads have room to tighten
European credit spreads should eventually move tighter to echo the gradual economic recovery in the Eurozone.
ECB’s new corporate sector purchase programme reinforces our preference for European credit versus US credit spreads.
Since the Eurozone recovery is mainly domestically driven, we believe domestic sectors will outperform globally exposed sectors.
The global sell-off of risky assets altered corporate bonds
The start of the year was marked by elevated financial market volatility, amid a sharp decline in Chinese equity prices and oil prices. This environment led to a downward repricing of riskier financial assets, with spreads of high yield (HY) bonds increasing more than investment grade (IG) ones. While the spread between high yield and investment grade yield rose, average corporate bond yields were broadly unchanged. Credit spreads rose mainly as a result of government bond yields falling. Yields on 10yr Treasuries and Bunds both dropped by 48bps year-to-date, to 1.79% and 0.15% respectively. Thereafter, the drops in risk free rates partly reversed as oil prices rebounded, economic data in the United States showed positive surprise and expectations of further monetary policy stimulus in the Eurozone eased investors’ fears.
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ECB set to buy IG Corporate Bonds
Interest rates cuts, as well as the effects of the European Central Bank’s (ECB) quantitative easing programmes – namely, targeted longer-term refinancing operations (TLTRO) and the expanded asset purchase programme (APP) – have contributed to improvements in money and credit dynamics since 2014. Between May 2014 and January 2016, the composite lending rate on loans to Eurozone non-financial corporations (NFC) fell by more than 80 basis points (bps) to 2.09%, according to the ECB. Moreover, the spread between interest rates charged on small loans and those charged on large loans (above 1 million euros) in the Eurozone has followed a downward path since the start of credit easing. Overall, this indicates that small and medium-sized enterprises (SME), which rely on banks for 80% of their financing, have benefited most from the ECB’s programmes. The reason why the ECB has first focused on SME is that they are critical to the recovery in the Eurozone as they provide two thirds of the jobs in the region and even more in peripherals countries. By including Investment Grade euro-denominated bonds issued by NFC established in the euro area in the list of assets that are eligible for regular purchases, the ECB is now enlarging its programme to also support larger firms.
This new programme along with the prospect for a greater divergence between the Fed and the ECB surely reinforces our preference for European credit spreads versus US credit spreads. The expected scarcity of EUR IG NFC bonds due to ECB’s purchases has pushed their prices higher. On the day following the announcement, European credit spreads for Investment Grade (IG) and High Yield (HY) tightened, by 13bps and 46bps respectively1. We believe there is room for spreads to tighten further as we get more details on the programme.
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Sector performance
The economic recovery in the euro area is continuing, albeit with signs of a moderation in growth at the beginning of the year due to a weaker external environment. In 2015, real GDP grew by 1.6%, its strongest increase since 2011. The March 2016 ECB staff macroeconomic projections forecast somewhat lower euro area real GDP growth at 1.4% in 2016 (revised down 3bps from December), at 1.7% in 2017 (revised down 2bps) and at 1.8% in 2018. The continuing improvement of the economy in the Eurozone should stimulate risk appetite and thus drive spreads tighter.
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The economic recovery in the Eurozone is mainly domestically driven, thus we generally prefer domestically exposed cyclical sectors such as Consumer Staples, Consumer Discretionary and Utilities, to globally exposed sectors, such as Chemicals, Industrials and Technology.
Year to date, Materials and Mining outperformed other sectors, with their credit spreads tightening by over 100bps and 200bps respectively. But, Materials credit spreads remain wide (at 105bps) by historical standards – average Credit Default Swap (CDS) spread since 2012 stands at 81bps. Despite its ongoing transition from investment to consumption based growth, China’s demand of aluminium, copper, nickel and zinc increased in 2015, according to data from the World Bureau of Metal Statistics. In addition, oil demand was strong in 2015, but the unexpected increase of supply more than offset the upward pressures on prices. Overall, we see room for spreads’ compression in Energy, Materials and Mining.
European corporates are still de-leveraging
Given the steady improvement in the Euro area growth trajectory, core European profit margins have improved and should continue to do so. The profitability of core European firms showed improvement, with retained earnings registering a double-digit annual growth rate in 3Q2015. European corporates increased their cash holdings to their historical highs and subsequently reduced their external financing.
European firms have not taken advantage of their improving credit quality and lower interest rates to issue more debt. Euro IG corporates issuance activity has remained stable since 2013, as European firms continue to deleverage their balance sheets. This trend should not reverse until firms foresee higher revenues from organic growth. As the recovery is likely to be gradual, we do not expect a supply shock in the Euro corporates credit market. Thus, we think there is more room for profits in the European credit market than in the US credit market, since US IG corporates began releveraging in 2011.
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1 We took the EUR iTraxx Main Index for the EUR IG bonds and the EUR iTraxx Xover as a proxy for the EUR HY bonds.
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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