Extension of the PSPP to some Credit names

As mentioned above, the ECB surprised in early July by expanding the scope of its Public Sector Purchase Programme (PSPP) to include State-owned (at least partly) corporate names such as Enel, Terna and SNCF Réseau. The list may be further expanded if the purchasable volume of marketable eligible instruments is insufficient. Despite the volatile context, it brought significant support to the new eligible names: for instance, Terna and SNAM spreads tightened by about 30 bps the day after the news. Overall, the news is positive for Credit markets as this easing monetary cycle will reinforce the active chase for yields.

IG Credit performance negative YTD

After showing good resilience in April-May, Credit spreads finally widened in larger proportions, reverting to 2014 levels. Combined with the rising rates at the beginning of June, Inv. Grade Credit market performance finally fell into negative territory year-to-date. Financials suffered the most, notably insurance subordinated debt. The tough negotiations to find a compromise between the Greek government and EU officials were the main driver of the negative performance. The lack of supply and the typical lesser liquidity pattern of quarter’s-end helped amplify the correction movements.

A more conservative positioning

We are keeping our positive view on the Credit markets overall (non-financial and financial sectors) as fundamentals are satisfactory. On the one hand, non-financial companies are preserving their cash levels and keeping their financial leverage under control. On the other hand, financial companies continue to gradually reinforce their capital ratios. Lastly, monetary support is really strong and more and more oriented towards the Credit sector.

However, we have adopted a more cautious stance given the current event risk in Greece. Since early June, we have reduced almost by half our overweights in terms of Credit exposure, rebalancing our portfolios towards EMU core names, which have exaggeratedly suffered to the detriment of peripheral names (buy Lloyds and Rabobank / sell Enel and Abertis).

From a sectorial perspective, we are keeping our overweight mainly on the Utilities, Telecom and Industrial sectors.