Macro Backdrop
Sentiment was stronger in May following a more volatile month of April. Spreads on EUR investment grade (IG) corporates widened by 13 basis points (bps) over the month but remained just 2 bps wider than levels seen on 2 April. Progress on tariffs talks was the key driver of this positive sentiment: constructive talks between China and the US led to a significant rollback in tariffs, while proposed 50% tariffs on the EU were quickly suspended. However, optimism from a US court ruling that invalidated most of Trump’s tariffs quickly faded, as the current tariffs remain temporarily in place and is likely to be overturned. Away from tariffs, rates rose in the US, as the 10-year Treasury yield was up 24 bps in May. This was driven by a combination of strong macroeconomic data in the US, concerns over budget deficits and, more marginally, Moody’s downgrade of the US. While consumer price index (CPI) and producer price index (PPI) figures came below expectations, the Federal Reserve (Fed) maintained rates unchanged and emphasised the high degree of uncertainty. Markets re-priced the number of cuts in the US from four to two. In Europe, rates were modestly higher, with 10- year Bund yields rising by 6 bps. EUR IG corporates delivered a positive total return of 0.75%, as measured by the Bloomberg Euro Aggregate Corporate Total Returns Index, driven by tighter spreads partly offset by higher rates.
Performance
The fund’s NAV (Institutional class, EUR) rose by 0.73% in May. Financials outperformed non-financials, with spreads widening by 10 bps versus 16 bps, respectively.
Across the capital structure, bank senior debt outperformed on a risk-adjusted basis, tightening by 16 bps compared to IG-rated Tier 2 bonds (Tier 2s), which also tightened by 16 bps. Insurance Tier 2s outperformed bank Tier 2s, tightening by 20 bps versus 15 bps. EUR AT1 CoCos were the standout, tightening by 31 bps. Top performers were mainly longer-dated senior and Tier 2 bonds from banks and insurers, which benefitted most from spread tightening and a slightly flatter yield curve. Detractors were mainly shorter-dated bank senior and Tier 2 bonds, which benefitted less from the spread moves.
Positionning
Issuance of green bonds from the European financial sector rebounded in May, with USD 6.8 billion printed, down 23% year-on-year (YoY) but close to the 5-year May average of USD 6.9 billion. We participated in a new euro Tier 2 issue from ING Bank, maturing in 2036 and callable in 2031, offering a 4.125% coupon. This was highly attractive with a spread of 189.3 bps and rating of BBB/Baa2/A- (S&P/Moody’s/Fitch), close to 1% yield and spread pick-up versus EUR IG corporates. Banks and insurers continued to deliver strong Q1 earnings, with no material impact from tariffs and credit quality remains resilient. As an example, NatWest reported a 36% YoY increase in operating profit and a 18.5% return on tangible equity (RoTE), with 2026 guidance slightly increased. Its Common Equity Tier 1 (CET1) ratio rose by 20 bps to 13.8% in Q1, representing an excess capital buffer of 3.3% or GBP 6.2 billion above minimum requirements. Asset quality was resilient, with loan loss provisions in line with management guidance and nonperforming loans (NPLs) remained low at 1.5% of total loans. The sector is expected to maintain strong fundamentals, with projected return on equity of circa 11% to 12% in 2025 and 2026.
Outlook
We remain positive going forwards, supported by attractive spreads and robust credit quality. We continue to see financials as the most attractive segment of the market, underpinned by solid balance sheets and earnings that have benefitted from the normalisation of interest rates.
With a yield to next call of around 3.5% and an average G-spread of circa 125 bps, compared to 3.1% and 100 bps for the broader EUR IG corporate market, we believe the fund offers an appealing opportunity to capture high income with potential upside from further spread tightening. This is particularly notable given the fund’s high-quality profile, with an average bond rating of BBB+ and an average issuer rating of A.
