La Française: Credit market convictions

La Française: Credit market convictions

November 16, 2023

Fixed Income
Obligaties (03)

By Aurore le Crom, Crédit Fund Manager, La Française AM

In October, corporate earnings significantly impacted equity markets, but the credit market remained largely untouched due to the strong overall fundamentals.

In the Investment grade segment, performance fluctuates depending on interest rates, which remained extremely volatile, with outflows on the longer end of the yield curve. We prefer the shorter end of the curve (< 5 years), as there is absolutely no yield curve steepness, and the segment is less volatile. We continue to favor short-dated financials and floating rate bonds for their significant carry component and lower exposure to interest rate volatility.

The performance of subordinated debt securities is highly volatile given macroeconomic uncertainty in Europe and continued interest rate volatility, which affects credit spreads. We expect November to be equally volatile and uncertain, and while yields are substantial, they may not be enough to sustain the market in these conditions.

Markets currently prefer less risky bonds to protect their performance. We favor AT1 securities with coupons in excess of 8%, which have lower volatility, despite the significant convexity offered by lower-coupon bonds. Additionally, we prefer subordinated securities (insurance issuers and Tier 2 bank debt) with carry on maturities of less than 3 years.

In the high-yield segment, the primary market remains subdued, while in the secondary market, there are significant outflows. Given the widening of spreads, be it on investment grade issues or lower rated (CCC) issues, investors are risk averse.  Our positioning remains cautious, with a preference for recent primary issues offering attractive coupons, and we favor sectors that are less sensitive to interest rate levels.

Interest rate volatility remains significant with a notable impact on credit. High coupons on recent issues, short maturities and floating rate coupons should provide shelter between now and the end of the year.

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