La Française: May – Credit market convictions

La Française: May – Credit market convictions

May 7, 2024

Fixed Income Geopolitics
Obligaties (03)

For the past 2 weeks, we have seen a return of volatility on the bond market, due to geopolitical risk and macroeconomic figures that continue to offset monetary expectations. Despite a (slight) widening of risk premiums, credit remains fairly resilient thanks to favorable technical factors.

On the investment grade side, the winds of volatility have scratched the segment's performance, but the spread of risk premiums has been relatively limited. The current earnings season is progressing smoothly, with decent results and no notable credit impact at this stage. The primary market is starting to become somewhat interesting again, with the return of credit line premiums relative to the secondary market. We maintain our preference for IG € vs. $, due to the differences in the rate outlook, and we maintain a moderate duration bias to offset increased volatility.

Furthermore, the subordinated debt segment, and CoCos in particular, suffered in terms of performance, and continues to correlate more strongly than HY with interest-rate and equity volatility. Market liquidity remains very satisfactory overall, thanks in particular to the dissipation of fears surrounding banks exposed to commercial real estate. Investors remain attracted to convex securities, and we expect a more active primary market with potentially attractive premiums. We prefer euro-denominated issues with coupons above 5%, in order to favor carry, or subordinated structures with short calls and price discounts, in order to play up their early redemption.

In the High Yield credit segment, the return of volatility has led to a slight widening of risk premiums. Nevertheless, despite this volatility, the primary market remains very active in both Europe and the United States. We participated in a good number of new issues, mainly from issuers looking to refinance, but also from newcomers. Indeed, some primaries represent interesting opportunities, with coupons that we consider attractive given the quality of the issuers. For example, we participated in the issue of a German leader in the manufacture and installation of metering devices (water, electricity) in apartment buildings.

In conclusion, despite the return of volatility, which is likely to persist on the fixed-income market, the global economy is holding up well in the end, and technical factors are still favorable to credit, supporting the asset class, which remains attractive thanks to its carry.

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