DNCA Invest Credit Conviction

The credit market fell sharply in September, weighed down by rising interest rates and widening spreads amid heightened tensions in the Middle East. The conflict intensified around the Strait of Hormuz and then spread to the Bab el-Mandeb Strait, pushing the price of a barrel of WTI crude above $105 during the month before falling back below $91. Against this backdrop, the 5-year swap rate rose from 3.21% to 3.60%, and investment-grade spreads widened by about 10 basis points. As a result, the investment-grade market posted a return of -1.33%, moving into negative territory for the year.

Faced with this energy shock and thanks to resilient growth, central banks were able to raise their policy rates. Consequently, the ECB's deposit rate rose to 2.50%, the BOJ's to 1.25%, and the Fed's to 3.75–4.00%. In contrast, the Bank of England opted to keep its rate unchanged, as the economy showed signs of slowing (composite PMI down to 51.7). France was also in the spotlight amid a political and fiscal crisis. As a result, the OAT-Bund spread exceeded 120 bps, up from 80 the previous month.

In the primary market, activity remained robust with €76 billion issued, marking the second-best September in terms of volume since 2019. Bank stocks, as expected, dominated trading volumes (the largest sector in investment-grade credit), followed by the telecommunications and services sectors, boosted by Uber's multi-tranche offering.

Over the month, the fund naturally posted a negative return of -2.28%, underperforming its benchmark (-95), due to our longer-than-market duration and volatility in certain convertible bonds. Indeed, our tactical strategy of buying futures contracts weighed on performance given the interest rate movements observed during the month. We remain confident in this positioning and believe the market is pricing in too much of a rate hike by central banks in Europe and the UK. On the credit side, our spread protection via indices and options provided some shelter for the strategy during the month and contributed positively to performance. On the convertible side, Kering underperformed, and our exposure to the real estate sector was also negatively impacted by interest rate movements. On the positive side, AT&S, Aixtron, and STM contributed positively to performance.

In the primary market, we participated in the offerings of Paramount, SES, Bertelsmann, Amazon (GBP), BMO (GBP), Brightstar Lottery (HY), Euroclear, Parker Hannifin, and Teva. In the secondary market, we reduced our exposure to real estate sector convertibles—LEG and Vonovia—and took profits on Soitec following its excellent performance. We also reduced our exposure to the long end of the yield curve for technical reasons. To protect the portfolio, we strengthened our hedging using iTraxx CDS options.