Monthly Commentaries

February 2024

Economic and investment highlights

Global Credit Strategy

February was a positive month for credit markets. HY spreads tightened almost 40bp, and cash markets outperformed, displaying strong investor appetite for bonds in both primary and secondary markets. Rates remained more mixed, with strong US data and a good amount of cuts priced in US curve limiting the tightening potential.

The Fund performed positively over the month, mostly thanks to alpha generation in specific ideas

As we highlight in our recent Algebris Bullet, we think markets are still priced for very high chances of soft landing, opening up to some risk of disappointment, especially as US data stay strong. We keep cash levels higher than our two-year average. We run a low net exposure via increased hedges on the CDS book. Duration is just above 2y, vs just above 5y in October.

More in detail:

  • The Fund blended YTC is 8.0%, with average rating BB+.
  • The Fund duration is now 2.1y, substantially lower than in late October. We have switched longs to shorts in US and European futures, advocating for a re-pricing higher in global rates. We have reduced long-end cash bonds which performed strongly.
  • Our net credit exposure is 53%. We have some 6% in cash currently, and hold protection via US IG and HY spreads, European HY spreads, EM spreads.
  • Net exposure in financials (incl. cash short and single name CDS) represents 38% of the book. AT1 and financial subordinated was a key trade in 2023, and some of the bonds re-priced 25% since March. The asset class outperformed since October. We remain constructive but reduce some of the winners.
  • Net corporates exposure (incl. cash short and single name CDS) represents 34% of the book. We focus on 8-10% yielding bonds backed by a solid pool of hard assets, at valuations that heavily discount the underlying value, or with imminent refinancing events.  American Greetings and Jet Blue where two key winners in February, as specific events (successful refinancing and deralied M&A) led to a bond rally.
  • Net EM exposure (incl. cash short and single name CDS) represents 16% of the book. In January, we added to a few hard currency positions with specific catalysts. Egypt was a key winner in February, as external financial support materialized and triggered a re-pricing of bonds. We generally added to high yield in CIS and selected African countries. We remain long LatAm local.


• The Fund performed positively in February, between 0.26% and 0.40% across different share classes.• Our Fund performed positively over the month, mostly thanks to alpha generation in specific ideas. As we highlight in our recent Algebris Bullet,  we think markets are still priced for very high chances of soft landing, opening up to some risk of disappointment, especially as US data stay strong.• We keep cash levels higher than our two-year average. We run a low net exposure via increased hedges on the CDS book. As of month end, the Fund’s blended YTC is 8.0% and Rates Duration is 2.1yrs, with average credit rating of BB+.

Financial Credit Strategy

February was mixed for risk assets, with some divergence between credit and equities. Excitement around AI, robust growth and good unemployment data resulted in a strong rally across global equity markets. The so-called Magnificent 7 recorded one of their best months at +12%, after strong results by Nvidia, pushing the S&P 500 up +5.3%. Asian indices also posted large gains, while the Eurostoxx was up a more modest 2%. Performance in credit was more mixed, as higher than expected inflation numbers for January led the market to reconsider the path of forward rates. Expectations of FED cuts for the year went from 146bps down to 85bps, while the ECB’s ended at 91bps from 160bps previously, sending Treasuries and Euro sovereigns down anywhere between 1.2-1.6% and acting as headwind for the rest of the credit market.

European financials performed in line to better than the market. Equities posted another solid month up 2.2% (SX7P), on the back of a broadly positive set of results for Q4 and supportive guidance for 2024. The narrative around net interest income remains one of stabilization, rather than reduction, as assets keep repricing and deposit betas remain well within expected levels. Costs growth is well below inflation and despite some deterioration around CRE, causing smaller specialized lenders to increase provisioning efforts, particularly in Germany, overall asset quality dynamics remain healthy, thus leaving annualized cost of risk around historical lows. Overall solid results with improving profitability continue to feed through to robust levels of core capital.

In credit, spreads kept tightening through February, particularly in AT1 on very strong technicals. Ongoing demand for yields and quality, in anticipation of lower rates, kept attracting strong demand in primary, acting as powerful conduit to spread tightening across primary and secondary. AT1 spreads ended the month 35bps tighter on average, while T2 and Senior were 12bps and 8bps tighter respectively. These exclude the smaller, CRE specialized lenders such as PBB and LBBW, which saw spreads adjust wider into results.

Although primary activity ebbed back in February after what was one of the busiest Januarys, it was still in line with last year’s issuance of EUR40bn, taking 2024’s total to EUR120bn. However, this year’s mix has shifted to more capital trades as issuers last year front-loaded a significant part of their funding needs. Importantly, we note that over half of this year’s AT1s up for call have already been refinanced and/or redeemed, and we expect more to follow the same path over the coming months. These technicals, combined with the ongoing positive fundamentals and relative attractive valuations, continue to drive the investment appeal of the Financials sector.

Financial Equity Strategy

FY23 results reporting continued through February, with UK banks taking center stage and delivering some strong share price performances (Barclays and Standard Chartered amongst top-5 European bank performers in the month). Through last year UK banks fell from market favour as they offered weaker NII momentum vs some of their more rate sensitive Southern European. In addition, the regulatory backdrop has posed a challenge in the UK (see recent moves on motor finance redress; consumer duty). However, we feel this is more-than-captured in still elevated implied cost of equity levels (>16% vs c.13% for broader European bank sector).

In our view, valuations had become overly discounted, and we believe share prices can continue to recover from here:

  1. NII  momentum. The UK remains a very competitive market but a key reason for weaker NII momentum at UK banks has been their mechanistic hedging strategies which are designed to smooth out rate volatility over time. These hedges can now stand them in good stead, supporting a more resilient trajectory into 2025 even as rates come down.
  2. Revenue diversification. As the market refocuses on the prospects of a reduction in rates over the medium-term, the diversified earnings streams offered by the likes of Barclays and Standard Chartered (c.50% revenues non-NII vs European average of c.30%) should become more highly valued.
  3. Capital return.  UK banks are amongst the highest yielding banks in Europe with ‘all-in’ consensus yields (including buybacks) averaging >13% on an annual basis going forward. We continue to see the yields on offer at European banks as a key attraction.
  4. Strong TNAV growth. The combination of earnings, cash flow hedges pulling-to-par, and buybacks at sub-tangible book valuations should generate robust growth in TNAV, a crucial driver of long-term performance for bank equities.

In short, plenty of negativity on these stocks, but they offer some unique aspects particularly in terms of NII momentum and growth in book value. After stark underperformance in the past year, we think the narrative can shift here and importantly very strong total payout yields should support valuations as well.