During October, spreads of the securities held within our portfolio were slightly wider. Concerns linked to tapering and less transitory inflation sparked interest rate volatility causing credit markets to underperform. This was the same for subordinated debt, despite the fact the asset class has low sensitivity to interest rates, as demonstrated by the performance year-to-date. Moreover, we are currently capturing spreads above 370 bps for subordinated debt of financials, which is significantly wider than pre-Covid. Going back further, prior to 2008, spreads of subordinated debt of financials were below 100 bps. These wide spreads still exist despite the fact that financials demonstrated their strong health during the pandemic and have significantly increased their capital over time. As such, we believe the securities held within our portfolio should perform strongly irrespective of the moves in interest rates. We have seen this happen during previous periods of tapering and rising interest rates. 

We are in the middle of Q3 earnings season and, as of the end of October, results of financials have once again been strong. This is due to the continuation of robust pre-provision income, as well as lower provisions and in several cases provision releases (ie reversing provisions for expected credit losses from prior results which did not materialise). As an example, NatWest released GBP 242 million of provisions made last year and its common equity tier one (CET1) ratio went up by 50 bps to 18.7%, which is more than twice the capital required. 

In conclusion, we believe our strategy is well positioned for the current environment. As we have demonstrated in past periods and this year, our strategy has very low sensitivity to interest rates. In addition, we are still generating high income, with good visibility due to the strong credit quality of financials. Finally, valuations remain attractive, and as such, we should benefit from that going forward.

  • Please read this important legal information before proceeding. Information contained herein are solely for the use of the person who has accessed this information and may not be reproduced or distributed, even partially, to any other person or entity. The material contained herein is confidential and intended solely for the use of the persons or entities with nationality of or respectively with their residence, domicile, registered office or effective administration in a State or Country in which distribution, publication, making available or use of the information is not contrary to applicable laws or any other regulation. The material contained herein is aimed at sophisticated, professional, eligible, institutional and/or qualified investors/intermediaries who have the knowledge and financial sophistication to understand and bear the risks associated with the investments described. The information is solely product-related and does not take into account any personal circumstances and does not qualify as general or personal investment recommendation or advice. In particular, the information is given by way of information only and does not constitute a specific legal offer for the purchase or sale of financial instruments. Moreover, nothing contained herein is constitutive of any tax advice. Every effort has been made to ensure the accuracy of the financial information herein but the information contained herein has not been independently reviewed or verified. Therefore, Atlanticomnium SA gives no assurance, express or implied, as to whether such information is accurate, true or complete and no responsibility is accepted by Atlanticomnium SA for any errors or omissions. Third-party content is the property of its respective provider or its licensor and is protected by applicable copyright law. Past performance is not indicative of future performance. The price of shares/units and the income from the funds/trusts can go down as well as up and may be affected by changes in rates of exchange or financial markets fluctuation, out of the scope of Atlanticomnium SA. To the fullest extent permitted by law, in no event shall Atlanticomnium SA or our affiliates, or any of our directors, employees, contractors, service providers or agents have any liability whatsoever to any person for any direct or indirect loss, liability, cost, claim, expense or damage of any kind, whether in contract or in tort, including negligence, or otherwise, arising out of or related to the use of the information provided.