Reasons that explain the credit spread differential
But the more cyclical character of the US market and the lower average credit quality of the issuers are not the only reasons that explain the spread differential. Another reason is the different investor base. It was already pointed out that the European corporate bond market is still young, while the US market is well developed and has attracted a broad base of institutional investors. Those investors are usually very concerned about markto-market losses, and therefore their decisions are driven by short-term considerations. Furthermore, hedge funds have been very active in the US corporate bond market over the last years. Both issues have helped to increase volatility. However, with the growing liquidity of the European corporate bond market and the increased professionality of investors, this differential probably will diminish.