Key Takeaways
- The euro corporate bond market has been on the rise since the beginning of the year, despite the vulnerable environment.
- Investment flows into corporate issues, solid balance sheets, and stable interest rates are making managers optimistic, but valuations are high.
- Among the largest active funds, some are taking a more cautious approach, while others are making strategic use of coupon income.
The bond market started 2026 with tight spreads between risk-free securities and corporate bonds, in an environment made perilous by rising public deficits, geopolitical tensions and new offerings to finance investments in artificial intelligence.
Eurozone corporate bonds got off to a good start, rising 1.2% since the beginning of the year. This continues the positive trend of the past 12 months, which saw a 3.2% increase in the Morningstar Eurozone Corporate Bond Index, compared to 1.6% for eurozone government bonds.
Managers Positive on Euro Corporate Bonds
Investment flows into eurozone corporate bonds, solid corporate balance sheets, the European Central Bank’s forecast of stable interest rates in the near future, and a growth-oriented macroeconomic environment, are leading fund managers to be optimistic about the asset class. But valuations are not cheap, and growing challenges are forcing them to use the levers at their disposal to create value for investors. Some prefer a cautious approach, others focus on careful bond selection, even if this means taking positions outside the benchmark, and others are strategically using carried interest, which means they prioritize seeking income from coupons.
Meanwhile, investors seeking diversification and higher returns than government bonds offer have allocated about EUR 1.92 billion to euro corporate bond funds and ETFs as of January, according to preliminary estimates by Morningstar. In 2025, this category was among the best performers in fixed income, with net inflows of EUR 19.20 billion. This is the seventh consecutive year of positive results.
Where the Largest Euro Corporate Bond Funds Invest
Giovanni Cafaro, Morningstar’s analyst on fixed income strategies, has examined the portfolios of some of the largest actively managed euro corporate bond funds with Morningstar Medalist Ratings. The sub-funds may be available to investors in a different share class than indicated, so performance, ratings and costs may differ.
Schroder International Selection Fund EURO Corporate Bond
- Morningstar Medalist Rating: Neutral
- Morningstar Rating: ★★★★★
- Fund size: EUR 17.1 billion
- Ongoing charges: 0.63%
The fund remains cautiously positioned given tight euro credit spreads, holding cash to deploy when valuations become more compelling. Recent activity was selective, adding high-quality short-dated financials and a few targeted opportunities while trimming weaker names. With eurozone services resilient but manufacturing still soft, the portfolio stays skewed toward higher-quality, non-cyclical issuers. Overall, positioning remains defensive, focused on preserving flexibility and capturing carry in a late-cycle environment.‑quality short‑dated financials and a few targeted opportunities while trimming weaker names. With eurozone services resilient but manufacturing still soft, the portfolio stays skewed toward higher‑quality, non‑cyclical issuers. Overall, positioning remains defensive, focused on preserving flexibility and capturing carry in a late‑cycle environment.
Morgan Stanley Investment Funds - Euro Corporate Bond Fund
- Morningstar Medalist Rating: Neutral
- Morningstar Rating: ★★★★★
- Fund size: EUR 6.3 billion
- Ongoing charges: 0.56%
The strategy continues to favor high-quality credit exposure, emphasizing financials over non-financials and maintaining selective off-benchmark holdings, supported by solid corporate fundamentals and a constructive technical backdrop. With no major portfolio shifts in December, the fund remains positioned to capture steady carry while limiting spread duration and focusing on security selection as late-cycle dynamics such as M&A and higher capex intensify. Overall, the team expects modest but positive credit conditions, supported by low default expectations and ongoing demand for investment grade yield. ‑quality credit exposure, ‑financials and maintaining selective off‑benchmark holdings, supported by solid corporate fundamentals and a constructive technical backdrop. With no major portfolio shifts in December, the fund remains positioned to capture steady carry while limiting spread duration and focusing on security selection as late‑cycle dynamics such as M&A and higher capex intensify. Overall, the team expects modest but positive credit conditions, supported by low default expectations and ongoing demand for investment‑grade yield.
BlueBay Funds - BlueBay Investment Grade Bond Fund
- Morningstar Medalist Rating: Silver
- Morningstar Rating: ★★★★
- Fund size: EUR 2.9 billion
- Ongoing charges: 0.61%
The strategy keeps interestrate duration broadly aligned with the benchmark, adjusting it tactically as conditions evolve. Corporate spread duration remains modestly overweight, reflecting the managers’ preference for quality carry. In a volatile backdrop, the portfolio leans into defensive areas such as utilities and industrials where valuations appear compelling, alongside an overweight to banks supported by strong capital positions and healthy earnings trends. Cyclical exposure remains contained.
Invesco Funds - Invesco Euro Corporate Bond Fund
- Morningstar Medalist Rating: Neutral
- Morningstar Rating: ★★★★
- Fund size: EUR 2.5 billion
- Ongoing charges: 0.76%
The portfolio maintains a core diversified investment grade allocation complemented by subordinated financials and selective high-yield exposure, reflecting a cautious but return-aware credit stance. Duration was modestly reduced amid rising government yields, while new issues and secondary market opportunities in financials and property related names were selectively added. Looking ahead, elevated yields and solid corporate balance sheets support the case for staying invested, though tight spreads argue for disciplined credit selection and measured risk-taking. ‑grade allocation complemented by subordinated financials and selective high‑yield exposure, reflecting a cautious but return‑aware credit stance. Duration was modestly reduced amid rising government yields, while new issues and secondary market opportunities in ‑related names were selectively added. Looking ahead, elevated yields and solid corporate balance sheets support the case for staying invested, though tight spreads argue for disciplined credit selection and measured risk‑taking.
