Hybrids and sub insurance could benefit from a further recovery

Credit markets rallied further after US President D. Trump softened his tone toward China on tariffs as well as toward J. Powell from the Fed. And this time, US$ credits were, logically, the first one to benefit from that change in attitude, with US HY spreads tightening by 53bp vs swap (24bp “only” for €HY), while US IG spreads tightened by 11bp (vs between 0 and -2bp for €IG spreads, see chart opposite). €-credit wise, the outperformers of the past week were AT1 first (-31bp), followed by corporate hybrids (-14bp) largely outperforming their senior counterparts (-0.5bp) even beta-adjusted, as well as financial T2s (-10bp). However, we believe the recovery is still very fragile: i / China has so far denied talks were underway to negotiate tariffs and the recent speech from Chinese leaders downplaying the impact from US tariffs do not bode well for a quick resolution of the US-China trade war, ii/ outflows are still significant in credit funds ($1.6bn in US HY funds last week, $1.14bn in US IG funds, almost $650mn in Lev loan ones according to Lippert-FMI data) , iii/ the recovery in credit spreads has actually been very quick (76% recovery on average since early April, before the Liberation Day), despite tariff uncertainties. Nonetheless , from a tactical point of view, some segments and sectors could benefit from a further recovery as they have been lagging in the last fortnight’s rally. That’s the case of corporate hybrids for instance, which have recovery “only” 70% from the peak around the 9 th April (see chart on next page), while corporate non-financial senior spreads have recovered by 88%.