Market backdrop
Credit spreads on EUR investment grade (IG) corporates were broadly unchanged in September at 116 basis points (bps). Credit spreads came under pressure during the first half of the month as sentiment was weaker, driven by a combination of heavy supply and mixed macro data coming from the US. Rates rallied as expectations of rate cuts on both sides of the pond increased. Sentiment turned in the second half of the month as the Federal Reserve (Fed) delivered a 50-bps rate cut – taken positively by the market as the return of a ‘Fed put’ outweighed concerns over a potential loosening of the labour market. The European Central Bank (ECB) delivered a 25-bps rate cut, roughly in line with expectations, however weak data prints in Europe led to markets pricing in further rate cuts as well. Rates declined materially, especially in the short end as curves steepened, with 2-year and 10-year German Bund Yields dropped by 32 bps and 18 bps respectively. Solid data prints in the US and the announcement of fiscal stimulus measures in China also supported better sentiment in the second half of the month. French names were under pressure given the renewed concerns around the country’s budget deficit, leading to an underperformance in French banks senior bonds for example. Bloomberg Euro Aggregate Corporates Total Return Index posted positive returns for the month (1.2%), benefitting from the move lower in rates.
Performance
The fund’s NAV (Institutional class, EUR) increased by 1.3% during the month. In September, financials outperformed non-financials, with spreads on EUR IG financials tightening by 3 bps, while non-financials widened by 2 bps. Bank seniors and insurance Tier 2 bonds were the top performers, tightening by 3 bps and 4 bps respectively. Bottom performers were mainly shorter-dated seniors that were less impacted by the move in rates.
Positioning
Issuance of green bonds from the European financial sector rebounded in September, with USD 6.3 billion issued compared to USD 2.2 billion in August 2024 and USD 5.6 billion in September 2023. Mergers and acquisitions (M&A) were in focus in September, with the big story being the potential acquisition of Commerzbank by UniCredit. The Italian bank surprised the market by acquiring a 9% stake in Commerzbank and subsequently increasing its stake to 21%. While regulators have been keen to see cross border M&A in the European Union, reflecting the benefits of having larger pan-European banks to compete with other large global banks, political risk remains a key hurdle. German officials have been vocal on their aversion to a potential tie-up, which creates material uncertainty around the ultimate outcome of the situation. We view a potential deal as positive for both UniCredit and Commerzbank in terms of fundamentals, creating a new European banking giant with a combined leading market share in Germany. Moreover, this would be a good test case for cross border M&A in the EU, serving as a positive catalyst for the sector. Our exposure to UniCredit and Commerzbank was 0.8% and 3.7% respectively, as at end of September, solely in senior bonds. Both names have typically outperformed over the month.
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 3.6% and an average spread (G-spread) of circa 145 bps on the fund (compared to 3.2% / 116 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 (average bond rating of BBB+ / average issuer rating of A) and similar duration compared to EUR IG corporates.
