Credit Markets appear to be expensive

Corporate Bond Strategy

Credit Markets appear to be expensive

Overall, with credit spreads tightening considerably on risky assets, key segments are running out of juice in the corporate bond universe and appear to be increasingly expensive. Another alternative could be to switch to products exhibiting higher yields, like Emerging debt, or Bank Contingent Convertibles (CoCos).

Favour European financial credit, Cocos continue to be instrument of choice

We continue to overweight the financial sector vs. the non-financial sector; the former is benefiting from better fundamentals and relatively attractive valuations (though spreads are narrowing rapidly and are at low levels). The financial sector is also supported by improving capital reserves (and asset quality), better margins (on the back of rising interest rates) and the regulatory landscape. Within the financial sector, CoCos continue to be our instrument of preference. The asset class is benefiting from earnings recovery, lower duration and a weaker correlation to US Treasuries. In terms of yield, these instruments match the levels presented by US high yield credit. Technicals are also sound, as there is a strong appetite from investors, though we note that the supply appears to be reducing. We remain selective, as the asset class could witness volatility as a result of specific events (such as any announcement of new regulations) and litigation risks on several banks.