Macro Backdrop
Sentiment was strong in January, with spreads on EUR investment grade (IG) corporates 12 basis points (bps) tighter. Demand for credit remains a key driver of spread performance, as inflows into IG credit remained strong, easily absorbing the high issuance in the first half of the month. While spread performance was strong, total returns were negatively impact by rising rates. Rates sold off materially in the first half of the month, extending the move seen in December, with the German 10-year Bund yield rising close to 30 bps to peak at 2.65%. The labour market in the US continues to show signs of resilience, while macro indicators continue to indicate strong growth. The threat of tariffs also fuelled the narrative of stickier inflation and higherfor-longer rates. Upward pressure on rates eased later in January following a lower CPI print (below consensus) and fading tariff concerns. As a result, bunds retraced about two-thirds of the move, resulting in a net rise of only 9 bps for the month, while 10-year Treasury yields fully reversed the move and ended the month slightly lower. The European Central Bank (ECB) delivered a 25 bps cut as expected, while the Federal Reserve (Fed) kept rates unchanged with hawkish narrative. Credit markets were resilient to the AI-related equity sell-off – which had limited impact on spreads and quickly reversed. EUR IG corporates, as measured by the Bloomberg Euro Aggregate Corporate Total Return Index (EUR), posted positive returns for the month (+0.44%) driven by tighter spreads and income, which were partly offset by higher rates.
Performance
The fund’s NAV during the month (Institutional class, EUR) was up by 0.87%. In January, financials outperformed non-financial bonds, with spreads tightening by 16 bps compared to 12 bps. Across the capital structure, bank Tier 2s and senior bonds outperformed, tightening by 22 bps and 18 bps respectively, while insurance Tier 2s slightly underperformed, tightening by 14 bps.
Top performers were mainly longer-dated bank seniors that outperformed over the month. Bottom detractors were mainly shorter-dated senior bonds that benefitted less from spread tightening.
Positionning
Issuance of green bonds from the European financial sector picked up in January, with USD 6.2 billion printed compared to USD 0.5 billion in December 2024. This represents a +77% year-overyear (YoY) increase from USD 3.5 billion in January 2024 and is close to the 3-year average (Jan 2022 to Jan 2024) of USD 7.1 billion. ANZ, one of the top four Australian banks, came to the market with a new EUR-denominated Tier 2 maturing in 2035 with a first call date in 2030, at a yield of approximately 3.7% or close to 140 bps spread to bunds rated A-/A3/A- by S&P/Moody’s/ Fitch. We view this as attractive compared to A-rated corporates, offering a circa 70 bps pick-up in yield for similar ratings and duration. The Q4 earnings season for banks kicked off strongly, with the first batch of results meeting or exceeding consensus expectations, while credit metrics remained robust. As an example, BBVA reported very strong earnings, closing the year with an impressive 19.7% return on tangible equity, a Common Equity Tier 1 (CET1) ratio marginally higher at 12.9% (circa EUR 15 billion excess capital to minimum requirements), and non-performing loans (NPLs) down sequentially to 3%. The bank expects to deliver a high teen double digit return on tangible equity (RoTE) in 2025. Apart from earnings, the theme of M&A continues unabated in the European financial sector. The latest headline took markets by surprise – Monte dei Paschi launching a hostile all-share bid for Mediobanca. The outcome remains highly uncertain, as the deal appears to be driven by politics and interests of large shareholders, while the industrial logic of combining both banks is limited. Nevertheless, an acceleration of M&A activity in the sector is credit positive.
In terms of fund positioning, we took advantage of rising rates to tactically increase the duration of the fund from around 4 to 4.4.
Outlook
We remain positive going forward – with attractive spreads against a backdrop of very strong credit quality. We continue to see financials as the most attractive part of the market, with rock-solid fundamentals and earnings that have benefitted from the normalisation of interest rates. With a yield (to next call) of around 3.5% and an average spread (G-spread) of circa 115 bps on the fund (compared to 3.1% / 90 bps for the EUR IG corporate market), we see this as an opportunity to capture high income with further upside potential from tightening spreads. This is despite the highquality bias of the fund, which has an average bond rating of BBB+ and an average issuer rating of A.
