As has been the case for most of this year, April was a weak month. Spreads on subordinated debt of financials widened significantly. This was partially due to concerns on inflation, which could lead central banks to tighten more aggressively than anticipated. Investors seemed to also be concerned about the potential of a recession. The lockdowns in China, as well as the continuation of the war in Ukraine did not help sentiment. On the positive side, credit fundamentals of European financials remain strong. We are currently going through Q1 earnings season, and banks seem to be delivering strong results especially from a profitability standpoint. Moreover, capital ratios remain at strong levels. As such, we have good visibility on the income our securities are generating. With yields at very high levels, we expect income will be a strong driver of performance going forward. On top of that, valuations are attractive, in our view, with a number of securities having spreads of 450-550 bps above government bond rates. As such, we have been looking to gradually add to certain bonds.

Our fund has demonstrated that it behaves well when interest rates rise. This is partially due to the fact we have a large number of fixed-to-floaters and floating rate notes. On top of that, from a profitability standpoint, financials benefit from rising interest rates. Therefore, the market weakness since the beginning of the year creates attractive opportunities, as spreads have widened significantly despite credit fundamentals remaining at strong levels.

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