Is volatility creating one of the best credit-picking opportunity sets in recent years?
A barrage of decrees and announcements from the new Trump administration has defined recent weeks, upending the world order and compelling many European countries to commit to increased defence spending. But for discerning, active credit investors, the spike in uncertainties – geopolitical, growth, policy – has created one of the best credit-picking opportunity sets in years.
Three credit portfolio managers from across Generali Investments affiliates shed light on how they’re balancing dispersion opportunities with the increasing risks of a constantly shifting macro landscape.
Simon Thorp
CIO Credit Opportunities
Aperture Investors
TRUMP, TARIFFS, AND CREDIT: MORE OPPORTUNITY THAN THREAT, FOR NOW
An obvious question to ask following the credit market volatility of the past few weeks is: “Has the 18-month credit bull market come to an end?”
Market strength was characterised by expectations of falling inflation and rate cuts combined with a goldilocks economic backdrop. Since the inauguration of the new US President, new factors have been taken into consideration, namely tariffs, European rearmament, and a perceived slowing of the US economy.
When we assess markets, we look at three broad areas:
MACRO: Clearly less certain than in recent months, although European (and perhaps Chinese) growth potential has improved since late 2024. Investors will need to keep a very close eye on US data at a time when the Atlanta Fed GDP tracker has fallen precipitously.
MICRO: The overall picture (how well companies are performing) remains benign, though weakness often follows macro deterioration.
Market technicals: Also remain strong with robust demand for credit products from investment grade bonds through to private credit, whilst supply is limited.
Net-net, we think it’s too early to call for a credit bear market but that would change if a US recession became a probability.
Looking through 2025, we believe that:
Uncertainty will increase the overall credit opportunity set for the discerning, fundamental investor.
Spread dispersion will remain elevated.
Thematic and sectoral opportunities (long and short) will increase.
Credit will continue to perform well assuming there is no US recession or sudden rise in the term structure of interest rates.
For portfolio construction, we will selectively add convex opportunities as dispersion remains elevated whilst using spread-based hedges (to protect against increased default risk on a macro slowdown).
Fabrizio Viola
Portfolio Manager, Active Fixed Income
Generali Asset Management
CAUTIOUS OPTIMISM IN EUROPEAN INVESTMENT GRADE
The first part of 2025 has seen cautious optimism in euro investment-grade corporate bonds, with strong inflows supported by positive returns, despite a challenging economic backdrop. Returns then moved slightly negative with the violent sell-off in rates that occurred in the first part of March. Despite this, excess returns, carry plus spread performance, remain positive given a sort of complacency around the higher quality part of the credit spectrum. Non-financials outperformed financials in this first part of the year, with utilities benefiting from a shift toward assets perceived to be safer. Subordinated bonds performed well, with hybrids slightly outpacing subordinated financials.
Total euro investment grade gross issuance reached €250bn, with net issuance of €50bn after redemptions. Following its rate cut in early March, the ECB may remain on the sidelines, awaiting further clarity on many aspects of the economy – particularly on inflation. A ceasefire in Ukraine could offset the negative impact of U.S. tariffs on corporate spreads, though yields may stay wider than expected due to rising defence spending. Despite the complexity of the current environment, high-quality, diversified corporate bond baskets remain attractive in our view.
Investment yields for senior bonds average between 3.3% and 3.8%, making them a strong fit for target yield buyers. In the senior space, we continue to favour financials, where robust balance sheets are better positioned for economic contraction. While non-financials have recently outperformed, they remain highly exposed to external factors.
In the subordinated space, we maintain a preference for corporate hybrids, which offer a better yield differential relative to senior non-financials. This positioning provides a relative advantage over bank Tier 2 debt, with yields approaching 4.5% without the need to move into high yield or AT1 instruments.1
NAVIGATING CREDIT DISPERSION: OPPORTUNITIES FOR ACTIVE PRIVATE CREDIT INVESTORS2
Despite tight spreads across global credit markets, significant dispersion is creating investment opportunities in public and private markets. With the new Trump administration driving policy changes and the Federal Reserve signalling limited rate cuts, the backdrop remains attractive for active and opportunistic investors like King Street Capital Management, who manage a private credit strategy available through the Lumyna liquid alternatives platform.
Higher rates are straining issuers with floating or near-term refinancing debt, many of whom structured their capital for a low-rate environment. This has led to unsustainable cash burn and rising U.S. bankruptcy levels, which hit a 14-year high. However, many opportunities will arise outside traditional bankruptcy, including capital solutions and liability management exercises (LMEs). In 2024, King Street tracked three dozen such transactions, leading or participating in twelve. These deals offer compelling returns and structural protections relative to loan-to-value estimates, screening favourably relative to other primary opportunities in corporate credit.
The “higher-for-longer” rate environment, alongside a $1.5 trillion broadly syndicated loan market with many issuers facing negative free cash flows, presents continued attractive opportunities to provide capital solutions in 2025.
In Europe, credit markets have expanded 3.7x since 2008, outpacing GDP growth of 12.5%. While recent small rate cuts have improved sentiment, borrowing costs remain historically high. LMEs are not prevalent in Europe, but we expect demand for flexible, non-traditional capital solutions as macro pressures intensify. Declining PMIs and potential recessions in core European markets like Germany and France highlight a growing opportunity set for creditors. While the maturity wall has been partially extended, complex restructurings will increase, an area where skilled private credit investors should have a competitive edge.
Additionally, asset- and real estate-backed securities offer compelling opportunities as global growth and geopolitics influence capital flows. At Lumyna, we believe today’s environment presents one of the best credit-picking opportunities in years, where deep research, strong sourcing, and active portfolio management across public and private markets will drive differentiation.
1 Source for all data: Bloomberg as at 19 March 2025.
2 Source: King Street Capital Management. This market characterisation reflects King Street’s beliefs as of the date hereof and is subject to various risks and assumptions that are subject to change. King Street’s market characterisation is based on subjective determinations that it believes are reasonable, and information herein includes third-party data that King Street believes is reliable but has not been independently verified. The investment strategy is subject to significant risks and there is no guarantee that the strategy will achieve its investment objective or avoid losses. The strategy does not benefit from any guarantee to protect the capital.
2 Risk Considerations
The objective of the fund is to offer exposure, through its investment in the Master Fund, to a diversified portfolio of investments with a focus on current income and capital appreciation. The fund is subject to the following risks: Debt and credit-related instruments, Risk related to bank debt, Risk related to lower credit quality securities, High yield debt securities, Risk relating to senior direct lending.
The use of financial derivative instruments and borrowings will result in the creation of leverage, calculated as follows: Gross method, maximum 175% of Net Asset Value - Commitment method, maximum 175% of Net Asset Value. This is not an exhaustive list of the risks. Other risks apply, differ by share class and are subject to change. For more information on the risks please read the prospectus of the Fund and KID where applicable, in particular the risks section.
2 Important Information
The information contained herein is confidential, nonpublic and proprietary. This material is intended for professional and institutional investors only and is not intended to be directed at or made available to retail clients or US Persons. The information contained in this document is only for general information on products and services provided by Lumyna Investments Limited (“Lumyna”) and Generali Investments Luxembourg S.A (“GIL”), as Management Company of Lumyna Alternative Funds SICAV. This is not an offer of securities in the United States. It shall under no circumstances constitute an offer, recommendation or solicitation to subscribe units/shares of undertakings for collective investment in transferable securities or an offer of investment services. It is not linked to nor is it intended to be the foundation of any contract or commitment. It shall not be considered as an explicit or implicit recommendation of any investment strategy or as investment advice. None of Lumyna, GIL or King Street accept responsibility for mistakes or omissions in this document and shall not be liable in respect of any damages or losses related to the improper use of the information provided herein. Where forward-looking statements are used, it should be noted that these may involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including general economic conditions, future acquisitions and competitive conditions. Lumyna and GIL undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Investment in the Funds carries substantial risk. There can be no assurance that the investment objectives of the Funds will be achieved and investment results may vary substantially over time. Investment in the Funds is not intended to be a complete investment programme for any investor. Investment in the Funds is intended for experienced investors who are able to understand and accept the risks involved. A prospective investor should appreciate that the value of any investment, and any income from any investment, may go down as well as up and that an investor’s capital is at risk and the investor may not receive back the amount invested. Past performance is not indicative of future results. King Street’s market characterization is based on subjective determinations that it believes are reasonable, and information herein includes third-party data that King Street believes is reliable but has not independently verified. There can be no assurance historical trends will continue. All figures as of December 31, 2024 unless otherwise noted.
The content of this Report is based in part on information from third-party sources, including third-party research, newspaper articles and white papers, which third-party sources King Street believes to be reliable, but no representations, guarantees or warranties of any kind are made as to the accuracy or completeness of such third-party information, and King Street does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance upon, such information. Any financial indicators or market benchmarks shown are for illustrative and/or comparative purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities or instruments) that are different from the Fund. All classifications and calculations are made at King Street’s judgment and discretion, are for informational purposes only and are subject to change without notice or update. Certain statements in this section reflect King Street’s subjective expectations, views and beliefs as of the date hereof and are subject to change without notice.
The Report was prepared for the Fund’s limited partners and is provided for historical reference only. The Report is not, and should not be construed as, offering investment advisory services or as an offer to sell or a solicitation of an offer to purchase interests in any vehicle managed or advised by King Street. Any investment performance included in the Report has been preserved to accurately illustrate the context in which the Report was prepared but should not be relied upon as a source for historical returns and has not been updated.
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This material is intended for professional and institutional investors only and is not to be directed at or made available to retail clients or US Persons. If the reader of this message is not the intended recipient you are hereby notified that any dissemination, distribution, copying, or other use of this transmission is strictly prohibited.
2 Investment Risks
Investment in the Funds carries substantial risk. There can be no assurance that the investment objectives of the Funds will be achieved and investment results may vary substantially over time. Investment in the Funds is not intended to be a complete investment programme for any investor. Investment in the Funds is intended for experienced investors who are able to understand and accept the risks involved.
A prospective investor should appreciate that the value of any investment, and any income from any investment, may go down as well as up and that an investor’s capital is at risk and the investor may not receive back the amount invested.
Past performance is not indicative of future results. Holdings and allocation data is subject to change and is for illustrative purposes only. This marketing communication does not contain all the risks associated with an investment in the Funds. Persons considering investing in a Fund should have regard to, among other matters, the considerations described under the heading “Risk Factors” in the Prospectus and the statements set out under the Risk headings in the relevant Supplement. Please refer to the Prospectus and key investor information documents (“KIDs”, where applicable) for the Funds for more information on general terms of investment in the Funds, risks associated with such investment and the fees. Investors should only invest in the Funds once they have carefully reviewed the most recent Prospectus and relevant KIDs as well as the latest financial reports. Applications to invest in the Fund must only be made on the basis of the Prospectus, the KIDs and subscription documentation. The current Prospectus, KIDs and annual and semi-annual reports of the Funds are available from www.lumyna.com. The Funds may not be suitable investments for you and you should therefore seek professional investment advice before making a decision to invest in any of the Funds.
IMPORTANT INFORMATION
This communication has been prepared by Generali Asset Management S.p.A. Società di gestione del risparmio based on information and opinions of the affiliated asset management companies of the Generali Investments Holding S.p.A. holding, relaying on sources both within and outside the Generali Group. While such information is believed to be reliable for the purposes hereof, no representation or warranty, express or implied, is made that such information or opinions are accurate or complete. The information, opinions, estimates and projections contained in this document are as of the date of this publication and represent only the judgment of the respective affiliate asset management company and are subject to change without notice. They should not be considered as a recommendation, explicit or implicit, regarding an investment strategy or advice. Before subscribing to any investment service offer, each potential client will receive all the documents provided for by the regulations in force from time to time, which the client is required to read carefully before making any investment decision. The cited asset management companies may have made, and may in the future make, investment decisions for the portfolios under management that are contrary to the views expressed here. Generali Investments Holding S.p.A. and the affiliated asset management companies assume no responsibility for any errors or omissions and shall not be liable for any damages or losses arising from the improper use of the information provided herein.
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