August was a month of two halves. The month began strongly, and this strength was extended following the lower-than-expected US CPI data. During the second part of August, we saw prices of risk assets fall. This was due to the macroeconomic backdrop regarding inflation and the energy crisis in Europe. However, we believe financials are well positioned despite the current environment. We have come to the end of Q2 earnings season, which saw banks report strong revenues, notably due to an increase in net interest income while asset quality remained strong. Spreads within our securities remain wide. We also saw some new issues during August which came at attractive levels. For instance, BNP issued a new additional tier 1 (AT1) in EUR paying a coupon of 6.875%. Lloyds issued a new AT1 in GBP paying a coupon of 8.5%.

These examples demonstrate the attractive opportunities at the moment. Our securities are capturing high income predominantly from investment grade issuers and on top of that spreads are wide and we expect them to tighten over time. In addition, as stated previously, most subordinated debt is still pricing extension risk. As an example, AT1, restricted tier 1 (RT1) and corporate hybrids are perpetual bonds which have call dates. During positive market periods, we believe they should benefit going forward as valuations tighten and these sequentially will reprice to the next call date. However, during risk-off environments such as this year, a large number of those securities reprice to perpetuity. This creates a double-negative effect on prices. As the large majority of our bonds are pricing the extension risk, we believe they should benefit going forward as valuations tighten.

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