General Market Review
US shares gained in January but lagged other regions as Chinese start-up DeepSeek challenged US leadership in artificial intelligence (AI). Eurozone shares began 2025 on a strong footing with gains in January outpacing other regions. The eurozone benefited from a rotation out of US tech stocks in January, while worries over trade tariffs eased. Regarding central bank’s decisions, we saw a continuation of the last months of 2024. The FED meeting at the end of January was a prime example: the elimination of the characterization of ‘progress on inflation’ immediately pushed yields higher. But FED chair Powell clarified in his press conference that no such signal was intended, which brought down yields to a level prior to the FED meeting. He also implied that getting to 2% inflation was not the threshold. Per end of month, market participants priced in roughly two rate cuts for the current year. Across the pond, the ECB decided to cut its key interest rate by 25 Bp to 2.75% raising the market’s expectation of a full-year policy rate cut of around -0.875% to -1.125% which would bring the key interest rate down to 1.875% by the end of 2025. In the US, the labour market was stronger as non-farm payrolls increased by +256k in December from +227k in November. The unemployment rate was slightly better than consensus at 4.1% in December. In the Eurozone, the unemployment rate remained stable at 6.3%. In the US, consumer price inflation for the month of December was in line with consensus and slightly higher than in the prior month. Headline inflation has increased by +2.9% (y-o-y) whereas core inflation (excluding energy and food) came in slightly below consensus at +3.2% (y-o-y). In the Eurozone, consumer price inflation figures for the month of December came in higher versus the prior month. Headline inflation has increased by +2.4% whereas core-inflation by +2.7% respectively. US 10-year treasury yields have decreased by -3 bp from 4.57% to 4.54%. On the other side German 10-year bund yields have increased by +9 bp from 2.37% to 2.46%.
The MSCI World Index rose by +3.5% (USD den.) and the MSCI Europe Index by a strong +6.5% (EUR den.).
Portfolio Management Report
The sentiment on fixed income markets was positive in January. Nonetheless market volatility likely to remain elevated in the short-term as inflation could be sticky. Thus, the recent move higher in rates could have been driven by a rise in the term premium rather than higher growth expectations. High yield credit spreads tightened: US High Yield (-24 Bp), Global High Yield (-18 Bp) and Nordic High Yield (-1 Bp).
The US-High Yield credit default swap market was lagging cash bond markets by tightening only around 11 Bp. The Nordic High Yield primary market continued to perform well in January and remained robust with volumes reaching NOK18bn (USD1.6bn equivalent) marking the highest ever issuance volume in January. A volume of around USD1.2bn equivalent was solely related to issues from US-Dollar- or Euro. Out of that, the bulk of issues (roughly 76%) was issued from transportation and energy companies. In the transportation sector, two important companies for us entered the market: Firstly, SFL Corp Ltd. issued a USD150mn senior unsecured bond maturing in 2030 priced at 99.50 with an attractive yield of 7.875%. Secondly, Scorpio Tankers Inc. – the world’s largest product tanker owner with a fleet of 99 vessels and a strong financial profile – headed to the market and raised USD200mn in a 2030s senior unsecured transaction.
Around USD22.0bn was priced on the US primary market, which was 29% lower than January 2024. Despite the volatility on the bond market, this was a solid start into the new year. Around 17% of total volume was issued from transport, energy and utility companies with the most prominent being the W&T Offshore transaction. The E&P company operating in the offshore segment with a focus on the Gulf of Mexico has gone through turbulent times with some selective defaults in the years 2016 to 2020. The company issued USD350mn in a 2029s senior secured 2nd lien deal priced at 10.75%. The proceeds were used to repay its outstanding amount of USD114mn on its Term Loan. Furthermore, the company entered into a new credit agreement for a USD50mn revolving credit facility that replaced the previous one.
During the month of January, the fund’s engagement in Nordic High Yield bonds was further increased. The fund management kept the effective duration of the fund at around 2.1% due to the ongoing interest rate volatility. On the 7th of January, a wildfire in Southern California that initially erupted as a brush fire spread from just a handful of hectares to more than 1,000 hectares within only a few hours. Since the wildfire broke out in the service area of Southern California Edison, the electric utility company for much of Southern California and the largest subsidiary of Edison International, securities of the company suffered tremendously. On the fixed income side, especially Edison’s two subordinated bonds with first reset dates in 2028 respectively 2029 were marked down more than 3 price points and spreads widened by more than 100 Bp within one single trading session.
On the following two days, after a short breather cash prices began to fall further to -10% and -11%. At the end of the month, the 2053s subordinated bond with first reset date in 2028 reached its peak at a spread of 580 bp, meaning a total yield of more than 10%. Hence, a downgrade of several notches is currently being priced in, which seems severe since Edison is still an Investment Grade rated issuer. We decided to sell the 2053s bonds and locked-in a negative contribution of -0.14% before things got hairy, as we could not model a) any potential material losses at Edison and b) whether any equipment of Edison could have ignited the wildfire. If the latter turns out to be the case, Edison might end like PG&E that gone through Chapter 11. Under Californian law, the company must pay solely for any damage caused if any technical equipment could be blamed for igniting the fire.
On the primary market we were notably selective by participating only in the new issue deal of Scorpio Tankers as it was attractively priced in terms of Relative Value.
For more information, you can find our latest Factsheet – January 2025.
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