During the month of August, spreads of the securities held within our portfolio remained relatively stable, despite concerns linked to the Delta variant of Covid-19, China policy changes, and the potential for tapering by the Federal Reserve. During the summer, in contrast to equity market volatility, the low volatility of the securities held within our portfolio demonstrated strong technical demand for subordinated debt, with spreads remaining attractive at more than 300 bps above government bond rates. Combined with strong technicals, we believe the securities in our portfolio can benefit from some capital appreciation. In addition, we are continuing to capture strong income. Furthermore, we should benefit from some idiosyncratic stories, such as Rabobank’s 6.5% securities and legacy securities. 

We have come to the end of Q2 earnings season, and the results of financials have been exceptionally strong. We believe this is set to continue for the remainder of the year due to both robust underlying income and provision releases (ie reversing provisions for expected losses from prior results that did not materialise). As an example, Rabobank released EUR 274 million of provisions in its Q2 results. The bank’s capital ratio increased by 40 bps to a Common Equity Tier 1 (CET1) ratio of 17.2%. This means Rabobank has excess capital of 7.2% or EUR 15.1 billion. These results, combined with the solid capitalisation of the financial sector, highlight the good visibility relating to the credit quality of the companies we invest in. 

In conclusion, we are still generating relatively high income, with good visibility thanks to strong credit quality. Furthermore, our fund has low sensitivity to interest rates. Valuations remain attractive, and we believe the securities held by the fund are well positioned to benefit from the current environment.

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