Monthly commentary Pareto ESG Global Corporate Bond
In the US, the Fed began its rate-cutting cycle with an aggressive double cut in September, followed by two additional cuts before the year’s end. Market expectations of the Fed’s stance have fluctuated during the year, which was reflected in large movements in market interest rates. The yield on the US two-year Treasury bond peaked in April at 5.0% before bottoming out five months later at 3.5%. Inflation has indeed moved closer to the target at a rapid pace, but data trends indicate that the last remnants of inflation are proving stubborn. Meanwhile, the US economy and labour market continue to show strength. Additionally, when Donald Trump won the US presidential election and secured a Republican majority in both the House and the Senate, it opened the door to expansionary fiscal policies that risk further fuelling US inflation. How much of Trump’s policy agenda will be realised remains to be seen, but market expectations for additional Fed rate cuts in 2025 have diminished.
In Europe, the situation is different. Indeed, the ECB delivered four rate cuts during the year, just like the Fed. But with a declining labour market, weak economic growth and a large-scale war on the continent, the eurozone faces entirely different challenges. At the centre of these struggles we find Germany, the eurozone’s largest economy. With an aging population, persistently high energy prices, and an industrial sector suffering from structurally diminished competitiveness, Germany’s GDP has completely stagnated since 2022. Market views on Europe’s weak economy are reflected in market expectations for further significant ECB rate cuts in 2025.
The year 2024 remained a good environment for companies turning to the bond market. We saw approximately $280 billion issued in US high-yield bonds and €105 billion in European high-yield bonds during the year. Most of these volumes were refinancing of existing debt. This is also reflected in the fund, where about 10% of the portfolio companies refinanced debt maturing in 2025 and 2026. Refinancing was being done at higher rates than before, which resulted in the fund’s average coupon rising to 5.5%.
Despite volatile market interest rates, the fund can report a year of strong returns, driven primarily by the current yield. Fund performance was broad-based, with no single sector standing out significantly either way. Credit spreads moved sideways at historically low levels during the year.
The fund remains committed to achieving its sustainable objective in accordance with the Article 9 classification under the SFDR. This year, environmental and social concerns continued to grow in importance. We believe that companies in the high-yield segment, in need of capital, play a pivotal role in driving the transition to a low-carbon economy and supporting industry leaders at the end of the value chain in meeting the evolving expectations of end customers.
We enter 2025 with confidence. While market interest rates may remain volatile, the fund’s higher current yield creates good conditions for another year of strong returns to the fund’s investors.
Portfolio management team
Philip Lindgren
Portfolio manager
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Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.