The current macro context “he is in favor of fixed income, as the ECB to continue cutting rateson the back of declining inflationary pressures in the Eurozone and growth should be resilient. Over the medium term, we expect spreads to remain well supported and rates to decline, offering potential for attractive total returns on top of carry. We are positive on Investment Grade bonds, which offer investors interesting levels of return (3.8% on corporate IG in euros)”. This is highlighted GAM in the commentary by Romain Miginiac, Head of Research for Credit Opportunities strategies at GAM Investments
IG Bonds, what are the prospects after ECB cuts?
We focus on the European financial sector, “which offers fundamental very solid and interesting valuations. After more than a decade of transformation following the great financial crisis, the sector is now one of the most resilient, with capital ratios at historic highs and NPLs at cyclical lows, thanks to very strict regulation. Bank profits have grown as rates have risen, now generating double-digit RoEs, an additional cushion for bondholders in case of need”.
GAM analysis
“Senior and subordinated debt valuations of financials are attractive, for example IG-rated subordinated debt of banks and insurers offers yields of between 4.5% and 6.5% in euro terms (1% to 3% higher than IG corporates).”
THEin terms of duration, “It is crucial to balance attractive yield levels with potential price volatility. Over the past year we have seen significant rate movements, with 10-year bund yields ranging between 1.9% and 3.0%, as the market has reassessed the number of rate cuts by central banks.”
“Subordinated debt typically has a lower duration than the euro investment grade market, however we expect the asset class to benefit strongly from the renewed hunt for yield as rates fall and yields recover further, with lower duration dampening potential rate volatility,” the analyst concludes.
