Crédit Mutuel AM: Monthly commentary subordinated debt
By Paul Gurzal, Co-Head of Fixed Income and Jérémie Boudinet, Head of Financial and Subordinated Debt, Crédit Mutuel Asset Management
2025 was a very good year for subordinated debt, with performances ranging from 4% to 5.5% across different segments, except for AT1 CoCos€, which posted an 8.5% increase (iBoxx index).
December was relatively quiet in terms of significant news regarding our market, which is to be expected as the holiday season approaches, with a steady and gradual appreciation of the indices throughout the month (+0.7% for AT1 CoCos€; +0.1-0.2% for other segments).
The trend towards spread tightening, driven by strong demand for any bond offering yield, outweighed the slump caused by threats of trade barriers or concerns about private debt.
We are starting 2026 with even lower spreads (264 basis points on AT1 CoCos, 159 basis points on Corporate Hybrids, 116 basis points on T2 insurance; Bloomberg indices), after more than two years of rallying.
So, will demand ease? We doubt it, since yields remain reasonable, the macroeconomic outlook is sound, and corporate fundamentals are in excellent shape. That said, we believe that performance prospects will largely depend on the carry provided by bonds. Primary supply should be easily absorbed, as issuance needs are unlikely to change.
We expect new issuers to enter the various segments, which is logical in a low-spread environment. In recent months, we have often found primary issuances unattractive, particularly for second-tier and lower-quality issuers, whose yield premiums compared to more defensive companies were too low in our view. This observation is likely to continue; we will therefore favour "premium" issuers.
While the Americans are deregulating their banks, Europeans are talking about "simplifying" banking regulations (with very few quantifiable consequences)... and reigniting the debate surrounding AT1s and their structure!
We should see again this year many more attempts to modify regulations, perhaps the emergence of a desire to tighten the rules on coupons, calls, and loss absorption for AT1s, but this is a long way off and should not happen for several years, and may even then give rise to a new type of "legacy" debt. Banking regulation is like fashion: a never-ending cycle!