Deutsche Bank Turns Underweight on Euro Corporate Bonds as Iran War Aftershocks Linger

This relative weakness is compounded by a divergence in monetary policy expectations. Markets are currently pricing up to three additional rate hikes from the European Central Bank by March 2027, while the Federal Reserve is expected to remain on hold . This hawkish ECB repricing raises borrowing costs for European companies precisely when their margins are already under pressure from elevated energy and input prices.

The Four Headwinds Squeezing European Credit

Deutsche Bank's downgrade identifies a cluster of negative factors that disproportionately affect Europe.

1. Stubborn Inflation and Energy Costs

The near-closure of the Strait of Hormuz has kept oil and natural gas prices elevated. Before the conflict, roughly 47 vessels per day transited east-to-west through the strait; since February 27 that average has plummeted to about 2 per day . Deutsche Bank and other analysts project that full normalization of traffic is realistically an end-of-2026 story, meaning energy supply disruption and higher input costs will remain embedded in European corporate expenses for the rest of the year . Europe's greater exposure to these rising energy prices already drove a sharper increase in German government bond yields and credit spreads than in the US during the conflict .

2. Rising Shipping Costs

The extended disruption at the Hormuz chokepoint has directly increased shipping costs for goods and raw materials. For European manufacturers and retailers that rely on global supply chains, these elevated logistics expenses arrive on top of already-high energy bills, creating a compounding effect on operating margins .

3. Tariff Uncertainty

Deutsche Bank's note explicitly cites ongoing tariff uncertainty as a negative factor, particularly for Europe . European exporters face an unpredictable trade policy environment that limits their ability to plan and invest, while simultaneously facing higher input costs at home.

4. Weak Corporate Pricing Power

Perhaps most critically, European companies have limited ability to pass these higher costs on to customers. Deutsche Bank's analysis points to weak pricing power in the euro area, meaning corporate margins face a double squeeze: rising costs that cannot be fully recovered through price increases . US firms, by contrast, have demonstrated stronger margin resilience.

Counterintuitive Market Pricing and the Aftershock Thesis

In early May, Deutsche Bank flagged that credit spreads in both the US and Europe were "counterintuitively" tighter than they were before the Iran conflict began, despite an energy shock, weaker growth expectations, and hawkish central bank repricing . The June downgrade to underweight euro credit signals that the bank now expects this anomaly to correct, but primarily through European underperformance.

The ceasefire announced in April did provide a temporary rally—German 10-year yields fell 18 basis points and Italian yields dropped 33 basis points on April 8—but the underlying energy cost burden on European corporates has not gone away . Christian Nolting, Deutsche Bank's global CIO for the private bank, emphasized after the ceasefire that the critical significance of the Strait of Hormuz remains unresolved, urging continued market caution .

The message from Deutsche Bank is clear: the war's direct hostilities may have paused, but for European corporate bonds, the real economic reckoning is only beginning.