Crédit Mutuel AM: Fixed income convictions
By Clémence Arrighi, Fixed Income Portfolio Manager, and Andreea Jusselin, High Yield Portfolio Manager, Crédit Mutuel Asset Management
The economic and financial environment has been supportive for risky assets this year.
In the eurozone, the European Central Bank put an end to its rate-cutting cycle and now maintains a neutral stance. Inflation is converging towards 2%, but growth remains low, penalized by industrial contraction and trade tensions.
In the U.S., the Federal Reserve prudently started an easing cycle in September, lowering its benchmark interest rates by 25bps and announced the end of its balance sheet reduction program, starting in December. This decision reflects a labor market that is losing momentum and an inflation that although falling, remains slightly above target.
In the credit market, despite some bouts of volatility, flows attracted by carry have supported performance for performance and have maintained risk premiums at historically low levels. Indeed, carry - above 5% on high yield and 3% on investment grade - has attracted significant inflows to European credit funds.
Investment Grade and High Yield funds have collected €43 billion year to date, which has enabled a record in primary issuance to be absorbed by the market. Since the beginning of the year, investors have absorbed €742 billion primary issues in IG and 116 billion in HY.
Conditions to issue remain favorable: low or even negative premiums, issuances oversubscribed by over 3 times, and an increased presence of multi-tranche deals from issuers like Alphabet or L'Oréal.
The resilience of credit is based on strong fundamentals and supportive technical drivers.
In this environment, we favor both financial debt - whether senior or subordinated - and non-financial issuers, regardless of their rating (IG or HY). The spread between bank and corporate debt has narrowed, while banks remain more exposed to sovereign risks.
The expected seasonal slowdown on the primary market at the end of the year, generally good quarterly results, a low default rate on the High Yield segment (which is further expected to fall in 2026), and a continued demand for carry, are all factors supporting the performance of IG and HY asset classes.
We remain prudent towards the risks of a widening of credit spreads, given the historically low current levels.
We favor EUR-denominated bonds, which we see as more attractively valued, and offer a better currency hedge against the USD.
In the absence of shocks, carry should nevertheless remain the main driver of performance.
We also favor quality, defensive sectors and the middle part of the curve.
In an environment where growth prospects appear favorable and technical factors remain predominant, we maintain a constructive view on credit, especially on well-selected segments.