January was a risk-off month. We saw volatility increase and equity markets fall, most notably within the US growth stocks. Credit markets and subordinated debt were not immune to this weakness as we saw spreads widening. Global government interest rates also increased during the month, with notably the 10-year Treasury going up 0.27%. The market weakness was caused by fears linked to inflation, as well as investors revisiting their assumptions of quantitative tightening and interest rate hikes. On top of that there were some geopolitical concerns linked to Russia and Ukraine, which contributed to this risk-off environment.
One positive is that subordinated debt of financials demonstrated significantly less volatility than the equity markets. However, we did see spreads on USD Additional Tier 1 contingent convertible bonds widen by more than 20 bps. This is despite the fact that credit quality remains at very strong levels. Capital ratios of European banks are close to all-time highs with Common Equity Tier 1 ratios of European banks above 15%. We also saw some securities fall significantly without any real justification. For instance, the Rabobank 6.5% coupon fell by approximately 8 points during the month. With a yield to worst of more than 5% in EUR, we believe those are currently at very attractive levels. Moreover, our strategy has low sensitivity to interest rates, as demonstrated in 2021, as well as previous periods of rising interest rates.
Earnings season has just begun and for the moment results are good, with credit quality remaining at very strong levels.
In conclusion, the recent market weakness creates attractive opportunities, as spreads have widened significantly despite credit fundamentals remaining at very strong levels.
