La Française: April – Credit market convictions

La Française: April – Credit market convictions

April 3, 2024

Fixed Income
Obligaties (03)

Each month looks like the next for credit markets. Despite data suggesting a certain persistence of inflation, spreads continue to tighten across all segments.

On the investment grade side, the primary market continues to register record issuance levels and to attract a lot of demand, driven by ongoing strong inflows. Spreads are tightening, with a significant outperformance of the financial sector. We continue to favour bank bonds due to tightening spreads. We still prefer euro denominated investment grade bonds over their dollar counterparts, which we find expensive by historical standards, particularly due to less favorable interest rate outlooks.

In the subordinated debt segment and for the first time in two years, the average yield on AT1 CoCos is in line with the average yield of High Yield bonds denominated in Euros; marking the close of a long-lived discount period and putting an end to the stigma associated with the fall of Credit Suisse. The current upturn has been accelerated by the relief obtained by the US regional bank New York Community Bancorp and the German bank Deutsche Pfandbriefbank, which have reassured the markets due to a lower risk of bank resolutions for the time being. The primary market is bustling across all subordinated debt segments, with coupons between 5% and 9%, demonstrating the attractiveness of the segment for investors. We have a preference for euro-denominated bonds, with coupons above 5%, due to their carry profile.

In the High Yield credit segment, idiosyncratic risk remains very present, as evidenced by the recent news surrounding a credit management company and a telecommunications operator. However, this does not seem to have destabilized the market, which continues to benefit from strong demand and low supply. Fundamentals, both in Europe and in the United States, remain strong.  They are supported by a resilient global economy and the decrease in short to medium-term refinancing needs. Indeed, the revival of the primary market as well as the emergence of alternative players, such as private debt, have enabled companies to find refinancing solutions. For valuation reasons, we prefer European and American high yield bonds over emerging market high yield bonds.

In conclusion, technical factors should continue to support the asset class. However, the already tight valuations have persuaded us to adopt a neutral stance for the month of April.

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