Next crisis will hit non-financial businesses, warns bond manager

De Coensel has upped his financial bond holdings by 10 percentage points in the Petercam L Bonds Quality fund since the beginning of the year.

The fund, which he co-runs with Johnny Debuysscher, is now 51% exposed to financials, a 7% overweight compared to the benchmark index.

’Within the context of this benchmarked strategy we assess that credit risk premia for non-financial senior paper is too low put against initial signs of increasing leverage metrics,’ de Coensel said.

’Within financials we see continued efforts in balance sheet deleveraging and recapitalization. Over time this will lead to a situation where credit spreads between senior financial and non-financials will cross towards a situation before the financial crisis and financials require a lower credit spread than on-financials.’

Within the asset class, de Coensel has a preference for US banks, in particular Goldman Sachs, JP Morgan, Wells Fargo and Bank of America, as he believes these have a much better leverage ratio than their European peers.

The manager also likes some bank tier 2 papers – Dutch, UK and Scandinavian names – and insurance subordinated bonds. ‘Companies like Allianz and AXA boast a rich, well capitalised and diversified business model,’ he added.

New positioning

Elsewhere in the fund, de Coensel has reduced his long spread duration/short rates strategic position over the past three weeks.

The reduction comes as De Coensel observed that the basis risk between credit spreads and German rates might increase.

‘We have benefitted from his trade over the past year. Now, we thought it was the right time to buy back our shorts in German bunds, take out the rate hedge and install a credit protection programme,’ he said.

De Coensel said he is also sacrificing a bit of carry in order to address liquidity risk and implement tail risk hedges.

Overweight US, underweight France and Spain

One quarter of the Petercam Bonds Quality fund is invested in the United States, de Coensel said.

‘The country’s strategic choices, both from a governmental and central bank perspectives, are better than those in Europe. US credit is better from a fundamentals’ point of view.’

De Coensel is also overweight Switzerland and Netherlands, which he views as safe havens, and underweight Spain, Italy and France.

‘We take a more defensive position in France, Spain and Italy as economic and fiscal policies in these countries are not improving at a fast enough pace,’ he said.

Over the past five years, the Petercam L Bonds Quality fund returned 41.82%, five percentage points more than the Markit iBoxx euro corporates index.