Macro Backdrop
Sentiment was weaker in April, with spreads on EUR investment grade (IG) corporates ending the month 14 basis points (bps) wider, after having widened more than 30 bps earlier. April was a very volatile month following Trump’s ‘Liberation Day’ tariffs announcements, which had a significant impact on global equity markets, government bonds and foreign exchange. Equity markets initially reacted very negatively, and excluding the Covid period, we saw the CBOE Volatility Index (VIX) reaching its highest levels in 10 years. This all started reversing following the announcement of a 90-day pause on some of the tariffs.
One area which remained relatively immune to this volatility was the corporate bond market. While we did see spreads widen at the beginning of the month, the impact was significantly less compared to other asset classes. German 10-Year Bund yields fell by almost 30 bps due to its safe-haven status and the European Central Bank’s (ECB) slight dovish stance, while US Treasury yields were slightly lower after initially rising. On the central bank front, the ECB delivered a 25-bps rate cut as expected. However, technicals turned weaker with the increased volatility.
Despite the wider spreads, EUR IG corporates posted positive returns for the month, with the Bloomberg Euro Aggregate Corporate Total Returns Index up by 0.99%, as lower rates more than compensated for the spread widening.
Performance
The fund’s net asset value (NAV) (Institutional class, EUR) was up by 0.86% during the month.
In March, financials slightly underperformed non-financials, with spreads widening by 15 bps compared to 14 bps for non-financials. Across the capital structure, Tier 2 bonds (T2s) from banks and insurers underperformed, widening by 20 bps as the risk-off tone led to decompression across the capital structure. EUR-denominated Additional Tier 1 (AT1) Contingent Convertibles (CoCos) widened by 38 bps in April, while bank senior bonds widened by 13 bps.
Top performers were mainly long-dated bank seniors and T2s that benefitted from the lower bund rates, despite the wider credit spreads.
Positionning
Q1 earnings have started, and results have remained solid, coming above consensus expectations on average, while credit metrics remained very strong. As an example, Barclays delivered impressive results with a Return on Tangible Equity (ROTE) of 14%, surpassing their guidance of 11% and their Common Equity Tier 1 (CET1) ratio increased by 30 bps.
Outlook
We remain positive going forward – with attractive spreads against a backdrop of very strong credit quality. We continue to see financials as the most attractive part of the market, with rock-solid fundamentals and earnings that have benefitted from the normalisation of interest rates.
With a yield (to next call) of close to 3.4% and an average spread (G-spread) of circa 140 bps on the fund (compared to 3.1% / 111 bps for the EUR IG corporate market), we see this as an opportunity to capture high income with further upside potential from tightening spreads. This is despite the high-quality bias of the fund, which has an average bond rating of BBB+ and an average issuer rating of A+.
