'We like Italian banks and insurance companies'
"Our approach is credit-focused, with low duration, positioned between high yield and investment grade."
Key points
Francesco Castelli, Banor's bond manager, outlines the bond scenario for the coming months with a focus on European credit,
What are your assessments and considerations in the European bond arena and which are the most interesting segments?
It is true that spreads and yields have tightened over the past two years, but European credit still offers, on the whole, attractive yield levels compared to expected inflation. At this stage, the segment we prefer is the financial segment. If we compare bank and insurance issues, both senior and subordinated, with industrial bonds of the same rating, we often see a differential in favour of financials. CoCo bonds issued by banks systematically offer a higher spread than similarly rated high-yield bonds. In our view, this is a premium that remains attractive, not least because fundamentals are improving: more robust capital, asset quality is holding up, profitability is supported by higher interest margins and a regulatory framework that has made many institutions stronger and more transparent over the years.
What about areas of credit that you consider risky?
After years of high yield outperformance, we have become more cautious and selective in 2025. We do not see a generalised European credit crisis, but some specific issues have weighed and continue to weigh on market performance. The risk, today, is mainly idiosyncratic, on the individual issuer: some highly indebted, others in sectors that are undergoing major change. In 2025, some names related to telephony and private equity financing suffered, areas about which doubts remain. In 2026, we see a difficult start to the year for chemicals, with negative earnings revisions and competitive pressure from increasingly aggressive Chinese supply. This can also be seen in the sector's share price, a sign that the pressure is industrial and not just technical. This is why we believe that selection will make a difference in 2026 as well. When there are negative factors concentrated on a few issuers, financial instruments such as AT1s can sometimes be more defensive than a high-yield basket 'laden' with individual weaknesses, while still offering comparable returns.
Where are you concentrating most at the moment?
Our approach is essentially credit-focused, with low duration, positioned between high yield and investment grade. The objective is to obtain income without being overly dependent on interest rate risk, while maintaining lower volatility than a traditional high-yield portfolio.
And on government?
Our credit management business is not a substitute for government bonds, but should be seen as a natural complement for those investors who already have exposure to the government market. However, government bonds remain a key asset for Italian private investors, especially because of the tax efficiency resulting from lower taxation.
