Is carry trade making a comeback ?

W hat is the takeaway from the first months of 2019? After the last months of 2018 were marked by a widening of credit spreads, self-sustained by a re-pricing of seniors in the secondary triggered by the primary and by the increasing extension risk for bank AT1, 2019 got off to a poor start , with further outflows from credit funds, elevated NIPs (much like at the end of 2018), and weak appetite for primary deals... … but gradually signals turned to green , starting with macroeconomic indicators out of the US, then appetite for the credit primary, in turn leading to a virtuous circle in which investors have been left chasing after the rally ever since the end of January . What risks for Q 2-19? Yet, exogenous risks have not disappeared, but most of them (except Brexit) have lost some of their sting (trade war, European elections in particular) and some of their capacity to derail a credit market now well into its stride... … especially as the resolutely dovish stance of leading central banks (in the United States as well in Europe) means that yield hunting has reared its head once again , at the same time keeping a tight lid on equity volatility. In the United States and China, credit risks are real, but unlikely to materialise in Q2-19, bearing in mind that, in the immediate term, macroeconomic indicators are even likely to improve in the Middle Kingdom thanks to the government’s stimulus measures. What credit allocation for Q 2-19? Barring a major accident for Brexit (bearing in mind that a no-deal cannot be ruled out even though the market visibly does not believe in this outcome), we recommend the following strategies: tactically , play a further rebound of bank AT1 ; we are taking our profits on bank T2 after their already strong rally and now prefer NPS and AT1; € HY and insurance subs can also be expected , in our view, to benefit from the relatively low risk environment , prompting investors to reach out for yield in absolute terms, in a context still marked by low default rates (at least in the short term); Continue to overweight € HY vs. $ HY for reasons to do with their relative valuation, credit’s momentum and the macroeconomic slowdown expected in the United States at the end of the year. In the IG segment, € credit offers more value than $ credit , save past 10 years and in the case of AA-rated issuers