Euro credit: what might starting yields tell us about future returns?

Euro investment-grade credit offers a stronger return foundation than in the low-yield era because income now plays a larger role and reduces reliance on falling rates or tightening spreads.

• Euro IG yields are above 4%, a level observed in less than a quarter of the monthly observations analysed, making the current starting point unusual compared with recent history.
• When starting yields were 4.0–4.5%, the average one-year return was 5.2%, with 94.4% of periods positive; for yields of at least 4.5%, the average was 5.5%, with 62.1% positive.
• Over three years, average annualised returns were 4.4% for starting yields of 4.0–4.5% and 6.3% for yields of at least 4.5%, while every period beginning above 4% produced a positive return.
• Higher yields increase carry, allowing income to cushion modest price declines when rates rise and reducing the need for bond prices to appreciate or credit spreads to tighten.
• Euro IG duration is now materially lower than during the peak quantitative-easing period, partly because higher coupons and yields have reduced the asset class’s sensitivity to interest-rate changes.

Takeaway: Euro IG may offer an attractive income-based foundation for returns over a longer holding period, but higher starting yields do not eliminate short-term volatility or the risk of losses if rates rise.