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This article first appeared on GuruFocus.

Goldman Sachs (NYSE:GS) analysts have turned more cautious on European bank debt, cutting their recommendation on euro-denominated high-grade bonds by banks to underweight, only months after scrapping their earlier bullish stance. Led by Lotfi Karoui, the team noted that bank bonds are now trading at even tighter spreads than the rest of the market, leaving little room for additional value. The analysts said the spread premium that once made the sector appealing is decidedly a thing of the past, and warned that tight valuations could limit upside potential from here.

The downgrade follows a strong rally in European bank bonds this year, as investors piled into the sector amid optimism over the industry’s recovery. But Goldman’s analysts cautioned that fiscal risksespecially in Franceare beginning to resurface, posing potential headwinds for the market. Political uncertainty in Paris has already pressured some French bank bonds, and Goldman said the fluid backdrop and challenging fiscal outlook make French issuers particularly vulnerable. The firm added that sovereign risks could be more damaging to bank bonds than to other corporate debt.

In late June, Goldman had already shifted both its U.S. dollar and euro bank bond calls to neutral, ending an overweight that had been in place since early 2024. The move to underweight suggests a more defensive tone, as the team believes investors may find better risk-reward opportunities elsewhere in credit markets. With spreads compressed and fiscal clouds gathering over Europe’s largest economies, Goldman’s message to clients is clear: the easy gains in bank debt could be behind us.