2026 Euro & Sterling Outlook: Back to Basics
Logan Miller - Head of European Strategy, CreditSights
Winnie Cisar - Global Head of Strategy, CreditSights
Anika Kiadhra - Analyst, Strategy, CreditSights
25 November 2025
Insights into 2026 Euro & Sterling Outlook: Back to Basics, including:
- Handoff from technicals to fundamentals: Credit quality and spreads taking driver’s seat as balance sheets remain solid but earnings growth faces scrutiny
- Fiscal spending optimism tempered: German stimulus may prevent stagnation but unlikely to spark economic boom exceeding expectations reflected in tight valuations
- ECB holding pattern divergence: Policy rates unchanged throughout year while other developed central banks cut, creating relatively hawkish stance perception
- Quality migration strategy: Moving up in credit spectrum as thin spreads leave limited excess return upside and higher-leveraged issuers face vulnerability
- Duration versus credit positioning: Sovereign bonds preferred for intermediate duration yield carry while corporates favored for shorter tenor spread carry opportunities
Executive Summary
Upgrading Euro IG to Market Weight from Underweight; downgrading Euro HY to Underweight from Market Weight. Maintaining Underweight allocation to Sterling IG for excess return-focused investors.
IG spreads leak wider on fundamental deterioration; HY faces acute pressure from elevated costs and rising defaults. Spread targets: Euro IG 100bp, Euro HY 350bp, Sterling IG 120bp; returns 1.5%, 3.0%, 5.0%.
Handoff from technicals to fundamentals as credit quality and spreads replace yields as primary drivers. Balance sheets solid but earnings growth uncertain; fiscal stimulus prevents stagnation but unlikely to spark boom.
ECB holds rates unchanged throughout 2026, appearing relatively hawkish versus other central banks cutting rates. Bund 10-year yield targets 3.00% as markets digest increased government debt issuance for infrastructure spending.
BOE cuts bank rate three times by 25bp to 3.25% by year-end 2026. Gilt 10-year yield forecast at 4.25% despite cuts as stagflation risks and elevated supply persist.
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