US high yield bond markets proved resilient to macroeconomic disruption in the first quarter, benefitting from steady demand from data center developers and big-ticket buyout-linked issuance.
The US market posted impressive first quarter gains, with year-on-year issuance up more than a third at US$76.4 billion. Data center-linked borrowing anchored the increase, and the market also benefitted from lower exposure to volatile software borrowers, where the launch of new AI tools has impacted valuations.
European high yield markets, by contrast, moved in the opposite direction, with issuance for Q1 falling almost 40 percent year-on-year to US$19.4 billion. Issuers and lenders pulled back from new deals following the US and Israeli air strikes on Iran and the resulting disruption to oil and gas supplies shipped from the Middle East.
Energy supply disruption also contributed to a year-on-year slide in APAC (excl. Japan) high yield issuance, which more than halved from Q1 2025 figures to US$3.3 billion. The bulk of the oil and liquefied natural gas shipped through the Strait of Hormuz serves Asian markets. Disruption to the route is forecast to have an adverse impact on APAC GDP even if the energy crisis proves transient, according to the IMF. This will weigh on Asian borrowers at least until the conflict ends.
Data center boost for US high yield
Data center investment to enable AI was a key contributor to the increase in US high yield issuance in the first quarter, providing a steady source of demand for capital in an otherwise patchy market.
Issuers linked to AI infrastructure construction raised US$27 billion in the high yield market through the first four months of this year, Bloomberg reporting shows. Data center issuance is set to remain a key issuance trend for the rest of 2026. Developer SE Cosmos, for example, is marketing US$999 million of high yield bonds to finance a data center project in Texas.
US issuance has also received a boost from high yield bonds raised to finance the mega-buyouts of computer game company Electronic Arts and broadcaster Nexstar Media. Compared to the leveraged loan space, these two large deals had an outsized effect on year-on-year comparables in the smaller high yield market.
Big-ticket issuance also meant that overall quarterly issuance skewed toward new money activity, with refinancing issuance flat compared to Q1 2025, while buyout and M&A-linked issuance posted year-on-year gains in the US.
High-quality issuers in preferred sectors continue to draw strong investor interest, but the space to refinance is narrowing as uncertainty around long-term energy costs and stock market performance lingers.
Middle East conflict takes toll on Europe
The conflict in the Middle East has taken a much heavier toll on European high yield markets than those in the US, with trading in the secondary market reflecting lender and investor anxiety.
According to Debtwire, average discounts for high yield bonds trading in the secondary market widened from around 98 percent at the start of the year to just under 95.5 percent by March, as sensitivity to risk intensified through the quarter.
Meanwhile, average yields to maturity widened from 6.1 percent at the beginning of the quarter to 7.5 percent by March.
Capital also flowed decisively to higher-rated issuers, with double-B-rated bonds accounting for 51 percent of issuance in the first quarter, up from 19% in 2025.
European high yield markets have, however, provided borrowers with opportunities to refinance floating rate debt at a lower cost with fixed-rate bonds.
The energy market shock, and the inflationary pressures it could provoke, may lead to interest rate increases later in the year. This has caused borrowers to flip to fixed-rate debt to bring down borrowing costs and protect against future rate hikes.
Nursing home company DomusVI, for example, has launched a €500 million bond to repay part of a €2 billion term loan, and Italian gaming business Lottomatica repaid floating rate notes maturing in 2031 with a fixed-rate bond, Bloomberg reports.
The delta between the cost of high yield bonds and leveraged loans may narrow if bond investors begin to demand higher coupons to compensate for anticipated base rates increases. But for now, a window to refinance in high yield markets at lower cost remains open, and issuers are taking full advantage.
Volatility stalks Asian market
The APAC (excl. Japan) bond market has endured even deeper disruption than Europe from the Middle East conflict and energy supply dislocation.
In March, the costs to insure Asian investment grade debt spiked to the highest levels seen in three years as concerns around the impact of the Iran conflict on credit quality increased.
Dollar-denominated Asian high yield bonds also bore the brunt of uncertainty. Average yield premiums on non-investment grade notes widened by 16 basis points in the first week of March, and higher energy costs put local currencies under strain, according to Bloomberg.
The market has responded well to any positive news pointing to a resolution of the Iran conflict. Default insurance costs dropped to the lowest levels seen in 11 months in early April (ultimately short-lived) as hopes of an end to the conflict came into view. Asian borrowers jumped at an opportunity to raise capital on the dollar-denominated bond market as a window for issuance opened in the middle of April.
A long-term resolution to the Iran conflict will position Asian high yield markets well for the rest of the year, but until then, issuers and investors will have to navigate a tricky period where activity is determined by unpredictable geopolitics.
Looking ahead, the rest of 2026 remains tethered to diverging geopolitical and technology-demand forces. While structural tailwinds related to the AI boom and data center expansion are currently insulating the US markets, Europe and Asia remain highly sensitive to energy security and inflationary risks.
