The slowing debt cycle, tighter credit spreads and reduced central bank support had already enticed us to take a rather cautious and neutral view on the corporate bond universe. There has, however, been some additional deterioration in fundamentals in the US investment-grade credit segment as leverage levels remain relatively high (and are higher than Euro IG for the first time in 10 years). Furthermore, the credit quality of the US IG segment also continues to deteriorate. With valuations that are no longer attractive, and with roughly 4.7 trillion set to mature through 2022, we are cautious on the US IG asset class and aim to hold an underweight position in it. We have also added CDX indices to our global bond funds.
We continue to overweight the financial sector vs. the non-financial sector, which is currently benefiting from better fundamentals and relatively attractive valuations (though spreads, narrowing rapidly, 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 remain our instrument of preference, benefiting, as they are, 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.