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Geopolitical risks seem to be taking a break. Fears of a hard Brexit are receding, and the Trade War is tempered by a resumption of negotiations. In this environment, and despite the continued macroeconomic slowdown, sovereign bonds rates have appreciated.
The Subordinated Debt and Investment Grade markets are currently buoyed by the expectation of the start of the CSPP (Corporate Sector Purchase Program of the ECB) in early November, and by the positive earnings season for banks confirming the well-established trend towards a reduction in non-performing loans and the refocusing of activities to optimize capital. To give some examples, Caixa Geral de Depositos completed the sale of its Spanish subsidiary to Abanca while Santander got rid of its Puerto Rican business. On a general basis, we believe the rating agencies are slightly behind in their assessment of these balance sheet improvements, particularly in Spain, Portugal and Ireland.
In this context, AT1 CoCos have significantly outperformed other subordinated debt segments since the beginning of the year for fundamental reasons. Indeed, the banking sector is one of the few sectors that has reduced its financial leverage, even though, as it was to be expected, this reduction in the leverage imposed by regulators has not been without consequences for the profitability of the sector and equity shareholders. On top of this, AT1s benefited from less sensitivity to rate movements and a higher spread component than many other sectors.
THIS DOCUMENT IS INTENDED FOR PROFESSIONAL INVESTORS ONLY AS DEFINED BY MIFID II.
It is provided solely for informational and educational purposes and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It cannot constitute investment advice or an offer, invitation or recommendation to invest in certain investments or to adopt an investment strategy. The opinions expressed by the La Française Group are based on current market conditions and are subject to change without prior notice. These opinions may differ from those of other investment professionals. Please note that the value of an investment may rise or fall and also that past performance results are no indication of future results. Published by La Française AM Finance Services, located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, nº 18673 X, subsidiary of La Française. La Française Asset Management is a management company agreed by the AMF under the number GP97076 on July 1, 1997. For more information, check the websites of the authorities: Autorité de Contrôle Prudentiel et de Résolution (ACPR) www.acpr. banque-france.fr, Autorité des Marchés Financiers (AMF) www.amf-france.org.
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