According to Goldman Sachs, corporate borrowers in Europe are facing dual pressures from rising government bond yields and increased competition for capital due to significant bond issuance by U.S. hyperscalers, projected to rise from $250 billion in 2026 to $420 billion in 2027.
As yields on France's 10-year government bonds surpassed 5% for the first time since 2002, investment-grade yields in Europe have increased by about 30 basis points to 4.4% since early September, while high-yield borrowing costs have surged by approximately 90 basis points to 7%.
This tightening credit environment is impacting company margins, with interest expenses rising from 1.25% to 1.85% of sales among Stoxx 600 companies since 2022, leading to a more than 5% reduction in earnings.
Companies with weak cash flow, limited pricing power, or significant floating-rate debt are particularly vulnerable, as rising yields and wider spreads could force management to prioritize balance sheet stability over investments or shareholder returns.
Goldman does not foresee a systemic credit event but notes that the rising cost of debt is a growing constraint, especially as earnings growth in Europe is expected to slow to less than 10% next year.
Mike Bell from RBC BlueBay Asset Management suggests that while investment-grade borrowers may not face major issues, investors should be more selective in high-yield credit, as fixed income opportunities are becoming more attractive compared to equities