Press release

Vienna – On 13 April 2023, at a Raiffeisen Capital Management press conference, Georg Nitzlader, head of the Fixed Income Team, discussed current trends on the bond markets and highlighted the increasing importance of ESG for these markets as well.

• Long-standing bull market for fixed-income securities finally ends in 2022

• Central banks stick with plans for rate hikes, due to the high inflation

• German 10-year bonds still negative in 2022, currently at around +2.25%

• Risk premiums on corporate bonds have risen recently, especially for bank bonds

• Nothing happens without ESG anymore – mounting costs for companies with sustainability deficits

• ESG integration in bond products: the investment process at Raiffeisen Capital Management

Long-standing bull market for fixed-income securities finally ends in 2022

In the previous year, corporate bonds came under intense pressure from rising inflation and the ensuing interest rate hikes by central banks. As Nitzlader explained, “The long-standing bull market for fixed-income securities finally came to an end in 2022, with a big bang as annual losses of 15% had never been seen before on the market for euro corporate bonds. Government bonds did even worse, and ironically enough it was the high yield market that was able to record the best performance in this environment.”

According to Nitzlader, even though spreads on corporate bonds – which were already unnaturally low due to the ECB’s support measures and the lack of alternatives in an environment characterised by negative yields – widened by more than 100 basis points at times during the year, 2022 was really not a typical crisis year for the credit markets. “The difference in 2022 was the dramatic rise in government bond yields. Double-digit rates of inflation forced central banks around the world to undertake a record-setting number of interest rate hikes and there is still no end in sight to this cycle. The yield on 10-year German government bonds was negative at the start of 2022 and reached 2.5% by the end of the year. Currently, it is around +2.25%.”

2023: Corporate bond issuers are doing well and government bonds are attractive again

What implications does this currently have for corporate bonds? The good news for investors is that yields right now are more attractive than they have been in quite a long time. Yields of 4.5% were last seen in the wake of the massive financial crisis in 2008/09. Issuers of corporate bonds are doing well, even though there are some problems in the cyclical sectors such as the chemicals industry or the real estate business, and the high point in credit quality is now behind us. Debt levels are still relatively low, and companies have taken advantage of recent years to secure attractive, long-term yields. Government bonds are also attractive again: Investors who lend money to the German state until June 2024 can pocket a return of around three per cent.

Risk premiums on corporate bonds have risen recently, especially for bank bonds

Due to the high interest rate levels, interesting portfolio returns can still be achieved even with a more defensive orientation. “From a sectoral perspective, we see the valuations of bank bonds as attractive, and these have become even more interesting in the wake of the events with Silicon Valley Bank and Credit Suisse. That said, of course, careful selection is important and the choice of issuers is crucial” said Nitzlader. “Above and beyond this, we are focusing on issuers of higher quality with medium maturities and strong ESG scores. Caution should still be exercised with longer maturities, but they will be attractive when core inflation finally peaks out.”

Central banks stick with plans for rate hikes, due to the high inflation

Despite the massive problems in the banking sector, the US Federal Reserve continued its series of interest rate hikes in March as well. It raised the key rate by one quarter of a percentage point to a new range of 4.75% to 5.0%. The goal is to counter the high inflation (8.5%).

Even just a short while ago, the fight against inflation appeared a bit of a luxury, as not only Silicon Valley Bank but dozens of other regional US banks were facing collapse because they were sitting on a powder keg of bonds that had lost value due to the higher interest rates. “Many observers thought that the Fed would move ahead with rate hikes at a slower pace, to alleviate some of the pressure on banks. But the Fed stuck to its plans to raise interest rates. This approach was made possible by the robust conditions in the US economy and the sustained, high level of demand,” said Nitzlader, who added that the European Central Bank was also following the principle of restoring price stability by way of higher key interest rates and had supported financial stability with its announcement that it would provide adequate liquidity against collateral if necessary.

As Nitzlader explained, “Once again, central banks around the world are indicating that they will extend support in the event of a crisis and provide financial institutions with capital. This has also triggered some criticism, because more and more money in the system fuels inflation as well.”

Right now, central bankers are faced with the conundrum of fighting inflation, while at the same time fostering confidence in financial stability. “All of this entails risks for the financial system. Banks are taking a more cautious approach and lending less, which undermines economic activity. Additionally, confidence in the banks has not only suffered due to the bank failures in the USA, but also due to the emergency sale of Credit Suisse,” said Nitzlader. The ECB intends to decide on a possible interest rate hike on 4 May. If there are no more major upsets until then, it will hold steady on its course.

Nothing happens without ESG anymore – mounting costs for companies with sustainability deficits

When it comes to bonds, there is no getting around the topic of ESG (environment, social, corporate governance) anymore. “Even though the issuance of green bonds and sustainable bonds is not as dynamic as it was in earlier years due to the decline in new issuing activity, it is clear that ESG is a key factor for bonds now. This applies for both government bonds and corporate bonds,” according to the Viennese bond expert. “At the same time, there are a lot of different definitions of sustainability, leading to really amazing surprises sometimes when it comes to bonds that are included in sustainable investment portfolios. Nonetheless, it is clearly visible on the bond markets that costs for companies with sustainability deficits are mounting. Poor corporate governance is also garnering more and more critical attention, and leading to corresponding risk premiums,” said Nitzlader, who also mentioned that the volume of sustainably managed bonds had almost doubled, from EUR 2.9 billion at end-2020 to EUR 5.4 billion.

ESG integration in bond products: the investment process at Raiffeisen Capital Management

These developments reinforce Raiffeisen Capital Management’s commitment to integrate sustainability considerations even more strongly in the investment decisions in the fixed-income segment.

Raiffeisen Capital Management has adopted a comprehensive ESG approach for government bonds. Every sovereign issuer in the investment focus is rated on the basis of Raiffeisen Capital Management’s sovereign ESG indicator. This rating covers all important ESG aspects and provides an overall idea of how sustainably a country acts compared to other countries. The selection of corporate bonds involves a multi-level process, which incorporates intensive, internal analysis by a specially-trained, interdepartmental working group, as well as external research findings (the “green path”).

Raiffeisen Kapitalanlage-Gesellschaft m.b.H. is the asset management company of the Austrian Raiffeisen Banking Group and one of Austria’s leading fund managers. It currently has assets under management amounting to EUR 39.7 billion (as of end-March 2023). Of this, EUR 20.5 billion is managed according to sustainable criteria. The company is represented in the key European markets and has repeatedly received awards from rating agencies and the business media for the high quality of its funds. Raiffeisen KAG is a member of the Raiffeisen Nachhaltigkeits-Initiative (Raiffeisen Sustainability Initiative). You can find more information at www.rcm.at.

For additional information, please contact:

Andrea Pelinka-Kinz (+43 1 717 07 - 8787) or
Pia Oberhauser (+43 1 717 07 - 2426)

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