Our Fixed Income Top Picks
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A constitutional crisis in Poland?
As Poland approaches the 2027 parliamentary elections, political tensions are mounting over disagreements concerning the composition of the Constitutional Tribunal. Moreover, the possibility cannot be ruled out that the governor of the central bank could soon be suspended from office in connection with a separate case, potentially deepening the political divide further. Against this backdrop, following an almost uninterrupted rally in recent months, the Polish stock market appears to be losing momentum, while the zloty has weakened to a three-year low against the euro. The domestic political situation may well have further surprises in store, while the Polish equity market, despite its strong performance so far this year, can no longer be considered particularly cheap.
Investors Shifted Toward Defensive Positions
The sharp correction weighing on technology stocks has so far had a much more limited impact on European markets. In fact, certain sectors are benefiting from the ongoing market rotation, which has been increasingly favoring defensive areas. Pharmaceutical and healthcare companies, in particular, continue to stand out. This week, we take a closer look at Koninklijke Philips, the healthcare technology and medical devices company. Alongside it, BASF, the German chemicals giant, has also moved near the top of our screen. In both cases, the current constructive technical setup has been preceded by an extended period of consolidation, potentially creating attractive opportunities for long positions as the emerging trends begin to take shape.
The rise in yields seen over recent months has created a new environment across global fixed-income markets. With U.S. 10-year Treasury yields above 5%, increasing fiscal concerns in France, and corporate credit spreads remaining historically tight, the importance of selection has increased. In our latest top pick list, we highlight bonds that may offer attractive risk-adjusted return potential as part of a suitably diversified portfolio.
Over the past few months, the bond market landscape has changed materially. Long-term yields across developed markets have climbed to new local highs. Current yield levels of above 5% on U.S. 10-year Treasuries and around 3.5% on German Bunds appear fundamentally justified. However, given elevated sovereign debt burdens and the resulting increase in interest servicing costs, significantly higher yield levels would be undesirable from both an economic and political perspective.
The corporate bond market has remained surprisingly resilient so far, although increasingly tight credit spreads are offering progressively less compensation to investors for the risks undertaken. At the same time, healthy corporate balance sheets and continued earnings strength suggest that there are currently no clear signs of systemic stress in credit markets.
Euro-Denominated Corporate Bonds
Yields on euro-denominated corporate bonds moved higher during the past quarter, driven primarily by the increase in risk-free rates rather than any deterioration in corporate fundamentals. Rising energy prices and renewed inflation concerns weighed on bond prices, while credit spreads remained relatively stable thanks to solid corporate fundamentals and sustained investor demand.
Dollar-Denominated Corporate Bonds
Dollar-denominated corporate bonds also experienced a meaningful increase in yields during the third quarter. The majority of the USD bonds included in our selection continue to be issued by Central and Eastern European issuers. The two OTP Bank bonds featured on the list are subordinated instruments and have been included in our top pick list for some time. In both cases, the issuer retains the option of early redemption (callability), which may significantly limit the yield ultimately realized by investors if the bonds are called before maturity.
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