Monthly Commentary - Pareto ESG Global Corporate Bond
After a tumultuous 2022 with great uncertainty and volatility, the fog cleared somewhat in January. Central banks are beginning to indicate that the massive rate hikes are gradually leveling off. The Bank of Canada was the first central bank to actively announce its intention to pause, after raising the key rate 25 basis points at the end of January to 4.5%. Canada has now raised interest rates by 425 basis points in 10 months. The great uncertainty now applies to whether (or when) there will be a recession in the US. The market continues to price a strongly inverted yield curve in the US with a 10-year Treasury around 3.5% and the US 2-year Treasury at around 4.2%.
New issues increased sharply during the month. In Europe, the primary market for bonds hit a record high volume of €293 billion, of which €4.3 billion was high yield. Order books were on average three times as large, indicating robust demand. We wrote in December that our forecast for the new issuance of the new year was a strong start, but this was more than we expected. All of this is positive for the economy as a whole; we have now a well-functioning capital market.
The fund’s development during January was very strong. Most quarterly reports coming in so far have also been reassuring, despite a noticeable slowdown in some parts of the global economy. From a credit perspective, it becomes paramount for the companies to focus on cash flows and keep the leverage at a sustainable level. The fund’s coupon yield will continue to increase going forward, as older bonds with lower coupons mature and new bonds with higher coupons and yield enter the fund.
We see very attractive coupons in several of these new issues, meaning the companies must pay significantly more than last year to borrow. The fund has taken the opportunity to both participate in a few selected ones and to exchange bonds with lower coupons for new ones with higher coupons.
New issues we participated in during the month of January are Lima Corporate, a 5-year bond with a yield of 10% in EUR. The Lima Corporate exposure is now increasing in the fund. The company operates in the health sector and focuses on orthopedics. The company works diligently with innovation and has been owned by EQT since 2016.
The fund also bought BNP AT1 7.375%, Jyske SNP 4.8% Green Bond and TDC Net 5.6%. In the secondary market, we sold Ahlstrom 3.625% against Fedrigoni 7.95% in coupon.
ESG and sustainability continue to be a forceful theme and we are now seeing a development where companies must start to show more specifically what they are doing regarding sustainability in concrete numbers and not only through promises.
The strategy going forward remains having a strong focus on companies that contribute with sustainable solutions here and now.
The fund is classified as an Article 9 fund under the SFDR Disclosure Regulation.
The synthetic CDS credit index strengthened during January. The iTraxx Crossover index went from +475 bp at the end of December 2022 to +414 bp at the end of January.
Portfolio management team:
Philip Lindgren
Portfolio manager
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