Credit Market Sours for Energy-Dependent Europe as War Grinds On

f(9[lqjdjlplmj2rq6wr1a}w_media_dl_1.png Bloomberg indexes, S&P Global

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(Bloomberg) — Exposure to energy imports is separating winners from losers in the global credit market, with Europe turning to a major pain point as the Iran war shows few signs of ending soon.

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Risk premiums on high-grade euro-denominated corporate bonds have climbed 13 basis points, almost triple the widening seen on their US counterparts since the start of the conflict. Investors have been buying more protection against default in European derivatives markets than in the US. And when Goldman Sachs Group Inc. forecast more credit spread widening last week, they told investors it will be more significant in Europe. 

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European economies — and companies — are looking increasingly vulnerable to disruptions in the flow of oil and other energy products as the war drags on, given the region’s higher dependency on imports than the US. For BlackRock Inc., which can track investor behavior in real time through its exchange-traded funds, there seems to be a mismatch in buyer sentiment.

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“We have seen slightly more derisking coming from European investors versus when I look at bond ETF flows in the US,” said Vasiliki Pachatouridi, head of iShares fixed income product strategy EMEA at BlackRock. “The sentiment in Europe has been impacted more,” she points out, citing the region’s proximity to the conflict, its energy dependence, and the impact on growth and inflation. 

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The firm has seen some outflows in Europe from euro high-yield and emerging market debt, she added.

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The US has been a net exporter of energy since 2019 thanks to fracking, which has allowed more crude oil and natural gas production, reversing more than half a century of reliance on imports. By contrast, there’s been a steady increase in energy import dependency among EU nations over the past 30 years or so, according to a study by Federal Reserve staff.

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The mismatch is particularly evident in credit-default swap indexes, the most liquid instruments in the global credit market. Investors bought $35 billion of protection on the iTraxx Europe index of high-grade names this month, compared to $18 billion on the equivalent index of North America companies, based on DTCC data compiled by JPMorgan Chase & Co analysts.

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CDS buying has helped drive up the cost of protection against high-grade defaults in Europe by almost twice as much as in the US since the war began. Euro-denominated corporate bonds, both investment-grade and junk-rated, are also faring worse.

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The trend has become more noticeable as the conflict stretches out, JPMorgan analysts led by Nathaniel Rosenbaum wrote in a Thursday note to clients. “The question then becomes whether this relationship should mean revert or is this conflict an entirely new paradigm for Euro credit?”

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Adjusting Sails

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It wasn’t always this way. For much of last year and even the year before, investors have talked about European credit looking more attractive than US debt helped by plans by Germany to bolster government spending on defense, for example. That would probably boost corporate profits. And US corporate bond spreads seemed to have little room to narrow after reaching historically tight levels in 2025.