La Française AM: Expect continued flows to credit market

La Française AM: Expect continued flows to credit market

6 maart 2024

Vooruitzichten
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February saw good earnings season in the US, but nothing notable in Europe. In March, continued flows to the credit market are expected.

‘February was marked by a good earnings season in the United States, but nothing notable in Europe, which we consider to be credit neutral,’ comments La Française AM today. ‘Despite volatile and punctual rising interest rates, the trend on Investment Grade credit spreads is towards tightening, especially with inflows to the segment.  The primary market is generating a lot of demand, and new issuances have been so well received by investors, that we feel they are less attractive than existing ones. We still favor Investment Grade credit, denominated in euros, due to interest rate dynamics and a resilient macroeconomic environment. We prefer bank bonds, which still offer a discount to non-financial corporate bonds.

Subordinated debt issues of a small German bank called Deutsche Pfandbriefbank, specialized in commercial real estate, notably in the USA, are in the eye of the storm. Bond investors lost their trust in the institution, and there is a non-negligible risk of a bank resolution. However, we are talking about an idiosyncratic event, which does not affect the rest of the subordinated debt market. Moreover, the primary market continues to be active, with issues attracting strong demand and issuers announcing the redemption of their AT1s at the first call date. In the short term, we expect volatility to persist as long as the German bank's situation is not resolved. However, we remain positive on the segment.

The High Yield credit segment benefited from positive inflows, especially on target maturity funds, despite the significant lack of new issuances. Indeed, the primary market remains idle, with issuers favoring loans or private placements, leading to a structural reduction of the segment. Spreads are at historically low levels, but we can expect credit spreads to tighten further if inflows continue. We prefer US High Yield bonds to their European counterparts, thanks to a more resilient macroeconomic outlook in the US.

In March, we expect continued flows to the credit market, which should support the asset class.’

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