La Française AM: AT1 primary market is back with a bang

La Française AM: AT1 primary market is back with a bang

8 december 2023

High Yield
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November was a good month for the credit market thanks to the significant tightening of short-term rates and the performance of equity markets. Credit volatility eased.

‘In November, performance was positive on the Investment Grade segment. Performance was driven by tightening credit spreads and the easing of interest rates, which nevertheless remain volatile,’ analyses Emma Gayrard, Crédit fund manager at La Française AM, today. ‘Primary activity was busy as the earnings season ended and was well absorbed by the market. We still prefer the short end of the yield curve, less than 5 years, as it remains relatively flat with lower volatility.

In our allocation, we continue to be overweight on senior financial bonds with high coupons and floating-rate bonds for their high carry and lower sensitivity to interest-rate volatility. January, traditionally speaking, is often a source of strong performance and significant credit inflows.’

Bang

‘The AT1 primary market is back with a bang, attracting strong investor demand which has supported the performance of the secondary market. This asset class remains however volatile amidst macroeconomic uncertainties in Europe and ongoing interest rate volatility. Duration was rewarded: Insurance subordinated debt and Corporate Hybrids outperformed on their longer maturities, as did AT1 bonds with the highest convexity (i.e., with the lowest prices). We expect December to be a quiet month in terms of flows and new issues and expect less tightening of credit spreads. We continue to favour bonds with high coupons, especially the more recent issues.’

High yield to Investment Grade

‘On the High Yield segment, November was marked by the reopening of the primary market, mostly for refinancing purposes. Issues were well absorbed, notably due to the return of inflows, mainly on ETFs. Some well-known high yield issuers have recently seen their ratings upgraded to Investment Grade, such as Elis, Marks & Spencer and Ford. Dispersion and idiosyncratic risk remained significant, with spread differentials between CCC and BB segments reaching unprecedented levels since 2016. We prefer recent primary issues, offering attractive coupons and good credit quality within the BB segment.

December should be calm in terms of primary issues and flows. Credit markets are expected to remain status quo. Performance should remain stable or even slightly positive until the end of the year, before turning positive in January.’

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