Resilience of Credit spreads in a volatile context

Despite the magnitude of the rate movement in May, Investment Grade Credit spreads remained rather resilient with a moderate slight widening of 5 bps over May (Chart 4). Only insurance subordinated debt and long-end of non financials detracted in a more significant manner. In this environment, we maintain our positive stance on Credit markets overall (financial and non-financial sectors) but with a more cautious stance as the Greece saga will continue to weigh on market sentiment in the next weeks.

Still positive overall

From a macro perspective, the EMU recovery is gaining momentum. From a micro perspective, non-financial companies are preserving their cash levels and keeping their financial leverage under control. From a sectorial perspective, we are keeping our overweight mainly on the Utilities, Telecommunications and Good & Services sectors.

We overweight the financial sector with a preference for subordinated debts as financial companies continue to gradually reinforce their capital ratios to be compliant with regulatory requirements.

Despite a recent negative newsflow, we are going down the capital structure by investing in high-quality companies issuing hybrid debts with attractive return perspectives. We think that the ECB sovereign asset purchases will lift the appetite for this kind of assets that investors are looking with growing interest.

We also continue to overweight BBB and peripheral names which offer interesting risk/return characteristics. We also like real estate senior debt which benefit from a positive business cycle and a soft valuation relative to the other sectors.

But cautious on some specific segments

We reduced our overweight positioning by a third in the beginning of June. On the non-financial sector, we sold some low beta names especially on the long-end of the curve. Paradoxically, higher rated names suffered more than BBB names during the bond sell-off (Chart 5). On the non-financial sector, we took partial profit on our positive bias on the Subordinated segment via Lower Tier 2 and Insurance debts as well as financial services.