Macro Backdrop
Sentiment remained constructive in August, despite spreads on EUR investment grade (IG) corporates widening by 6 basis points, which remains close to the tightest levels we have seen in the last 10 years. The month started with weaker employment numbers in the US. As such, the market focus shifted to the potential for interest rate cuts in the US. Jerome Powell’s speech at Jackson Hole seemed to be going in that direction. However, the potential firing of Lisa Cook from the Federal Reserve has put central bank independence back in the spotlight. This created some volatility. Moreover, the announcement of a vote of confidence regarding the government in France has created some uncertainty, and this weighed a bit on French assets. Rates in the US were lower following the weak employment numbers, with 10- year US Treasury yields down 14 bps, while 10-year German Bund yields were 3 bps higher. Technicals remain very supportive for credit markets, especially as issuance was low in August and credit continues to see very strong inflows. EUR IG corporates delivered flat total returns of 0.02% in August (as measured by the Bloomberg Euro Aggregate Corporate Total Returns Index in EUR), with income generation offsetting the modest spread widening and the impact of higher rates.
Performance
The fund’s NAV (Institutional EUR share class) was down -0.04% in August. During the month, financials slightly underperformed non-financials, with spreads widening by 6 bps versus 5 bps, respectively. Across the capital structure, insurance Tier 2 capital bonds (Tier 2s) outperformed, widening by just 2 bps, compared to bank Tier 2s and senior debt, which widened by 8 bps. EUR Additional Tier 1 (AT1) contingent convertible bonds (CoCos) were 6 bps wider over the period. Top performers were mainly insurance Tier 2s, which outperformed the rest of the capital structure. Key detractors were mainly bank senior debt, as well as French issuers, the later impacted by heightened French political risk.
Positionning
Issuance of green bonds from the European financial sector picked up in August, with USD 5.6 billion printed, more than double the USD 2.2 billion in August 2024. We participated in a new EUR Tier 2 from KBC Bank, maturing in 2036 and callable in 2031. The bond was issued at a 3.7% yield, equivalent to a 137 bps spread over government bonds, and is rated Baa1/BBB/BBB+ (Moody’s/S&P/ Fitch). The new issue came at attractive levels compared to IG corporates, offering around 60 bps pickup in spread. Several insurers published their Q2 earnings in August, for example, Munich Re reported very strong H1 2025 earnings, delivering a 19.7% return on equity while maintaining a rock-solid solvency ratio of 287%. Finally, French political risk came back into focus in August, as the French Prime Minister has called for a no-confidence vote in early September. This led to OATs (French government bonds) widening by 10- 15 bps versus German Bunds. OAT-Bund 10-year spread now stands at approximately 80 bps, close to the year’s widest levels (circa 90 bps), meaning that the bulk of the uncertainty is aready priced in. The fund maintains a circa 19% exposure to French issuers, with the majority in senior bonds (circa 13%), focused on high-quality issuers and diversified names. For example, the largest exposures are in names like AXA, BNP, Crédit Agricole and Société Générale, which together represent around 80% of the fund’s French exposure. We see no material impact from the political situation on these French issuers.
Outlook
We remain positive going forward, supported by attractive spreads against a backdrop of very strong credit quality. We continue to see financials as the most attractive segment of the market, with rock-solid fundamentals and resilient earnings that have benefitted from the normalisation of interest rates. The fund offers a yield to next call of around 3.4% and an average G-spread of circa 105 bps, compared to 3.1% yield and 84 bps for the broader EUR IG corporate market. We see this as an opportunity to capture high income with additional upside potential from further spread tightening— despite the fund’s high-quality bias, reflected in an average bond rating of A- and an average issuer rating of A.
