December started with strong performance as spreads tightened significantly (EUR Investment Grade (IG) spreads tightened by 13 bps on the month) following November’s sell-off. The second part of the month saw flat to tighter spreads against a backdrop of rising rates from more hawkish central banks – with clearly hawkish tones from the Federal Reserve (Fed) and Bank of England while the European Central Bank (ECB) delivered a marginally hawkish tone (monetary policy continues to be supportive overall). The 10-year Germany government bond yield surged by around 20 bps on the month to -0.18%. Across the capital structure, Additional Tier 1s (AT1s) (-50 bps on the month) outperformed insurance subordinated (-26 bps), bank’s Tier 2 (-16 bps) and senior IG (-13 bps). Overall the fund delivered a slightly positive performance over the month, as spread tightening more than offset the impact of rising rates.
December issuance was light with only EUR 1.7 billion of fresh supply, mainly in senior format, following the market turbulence at the end of November. Interestingly we saw one new deal from the insurance sector in subordinated format (Tier 2), from Uniqa. This was the group’s second green Tier 2, a 2.375% EUR Tier 2 with a maturity in 2041 and callable in 2031. At a spread at issuance of 235 bps this came at the wider end of the euro Insurance Tier 2 market, particularly attractive for a BBB rated bond (A- issuer rating). We switched from the shorter dated 3.25% 2035 bonds (callable in 2025) given a very steep spread curve (70 – 75 bps pick-up in spread). The group scores “Medium Risk” for its environmental profile under our internal scoring framework (“Low ESG Risk” overall). However, we have decided to invest after engaging with the issuer. Our engagement resulted in a conviction that the trend was positive, for example the adhesion to the Net Zero Asset Owner Alliance, which brings froward setting the group’s interim science-based targets.
In terms of positioning, beyond the switch to the new Uniqa Tier 2, we also added several positions. Two notable positions we added were senior preferred (super-senior debt that is out of scope of bail-in) from NIBC, a niche Dutch bank and UniCredit, the leading Italian lender. Both offer very attractive spreads, especially compared to senior non-preferred (bail-inable senior) from core European banks.
We continue to see strong value in green bonds of European banks and insurers. With an average yield of 1.4% on the fund and an average spread of 150 bps we are capturing close to triple the yield of 0.5% on IG corporate bonds. We remain biased towards high quality issuers (BBB+ average bond rating).