La Française: February – credit market convictions

February 7, 2024

By Jérémie Boudinet, Head of Investment Grade Credit, La Française AM

January felt like a condensed version of 2023 for credit markets, meaning that spreads were mostly following the direction of rates, and that market sentiment proved once again to be versatile, but positive in the end.

The Investment Grade segment was blessed with tremendous inflows last month, thanks to markets pricing in a more positive macro backdrop. These flows easily absorbed the volume of new issuances, that are seasonally significant at the beginning of the year.

With the earnings season now in full swing, we expect neutral credit trends overall, along with supportive market technicals for bonds in February. We continue to favor the shorter end of the yield curve, with the absence of a true yield slope, and we still prefer bank bonds, which are discounted relative to non-financial corporate bonds.

The spreads of subordinated debt have been quite correlated to CDS indices lately, and especially to the iBoxx Crossover. Appetite for new paper has been very strong, with many new bonds hitting the market and attracting strong demand, whether that may be for core players of more niche or inaugural emissions.

The technical backdrop continues to look attractive moving forward, as bank bonds, both Tier 2 and AT1 CoCos, still trade wider than regular High Yield bonds. We have a preference for Euro-denominated AT1s and bank Tier 2 bonds with coupons above 5 %, thanks to their carry profile amid volatile markets.

The High Yield segment has been well supported by positive inflows and just a few new bonds hitting the market, which allowed spreads to tighten once again. A flurry of new idiosyncratic stories hit the market, this time with Spanish pharma company Grifols or the French software company Atos, highlighting the dispersion of the segment across names and industries.

We have a neutral view on spreads, which look fair when compared to fundamentals and market technicals. We prefer US High Yield bonds against their European counterparts, thanks to a more resilient macroeconomic outlook in the United States.

In February, all eyes will be turned towards the year-end results of European companies. We do not expect very broad moves, but we will keep a close eye on cyclical industries, as a bellwether of the European economy.