Ofi Invest AM on flexible management as a solution amid volatility and dispersion in the credit market
7 MAY, 2006
In a market shaped by volatility, dispersion, and shifting macroeconomic forces, we speak with Ofi Invest Asset Management to understand how investors can stay ahead. From resilient credit fundamentals to the return of market swings, they explain why flexibility has become a critical edge in portfolio management. How active, unconstrained strategies can help capture opportunities across the credit spectrum while managing downside risks? And how these principles are being applied in practice today?
What is your current assessment of the credit market?
Overall, the credit market has performed well at the beginning of the year. Beyond the underlying tensions related to AI and private credit, the most significant event has been the war in Iran, which – for now – has largely spared the European credit market. Investment Grade credit spreads have remained relatively stable at around 85 basis points, while High Yield spreads widened by about 80 basis points at the peak before tightening again below 300 basis points.
The euro credit market, particularly the High Yield segment, remains resilient. While credit spreads are at historically tight levels, the asset class continues to display an elevated carry, with risks primarily linked to market volatility and issuer selection, which can be actively managed although it doesn’t eliminate the risk of loss depending on market conditions. Many issuers have already passed their refinancing walls, while higher‑risk issuers are well identified and concentrated in the CCC segment, where default rates nonetheless remain contained although historically higher than in other rating segments. Inflows remain well above long‑term trends, highlighting investors’ appetite, who – in our view – see the return of volatility more as a source of opportunity than a constraint although it can also lead to increased downside risk depending on market conditions.
Which strategy seems most relevant in this environment?
In an environment as uncertain as today’s, a flexible approach appears to be the most appropriate to support investors. Subject to market conditions and investment risks, total return bond strategies therefore stand out as a particularly relevant solution – not merely as an opportunistic style, but as a core management tool.
Unlike traditional indexed or thematic strategies, which are often constrained by predefined exposure to certain market segments, total return strategies seek absolute performance across the entire credit market. They offer significant allocation freedom, allowing active arbitrage between various performance drivers: carry, credit exposure, duration management, yield‑curve positioning, and relative‑value strategies.
This flexibility is even more valuable as the credit market appears to be moving away from its historical averages, reviving the fundamental principle of mean reversion. In such a context, the ability to reduce risk, implement tactical hedges, or exploit opportunities uncorrelated with major indices may be suitable in certain market conditions.
How has this approach been reflected in your management?
The management of our fund, Ofi Invest Alpha Yield – an international corporate bond fund – illustrates how a total return strategy may be implemented. We have been particularly active in steering this strategy, which is structured around three main pillars.
Allocation has been flexibly adjusted across five performance engines of the fund – senior Investment Grade, senior High Yield, financial subordinated bonds (Tier 2 and AT1), and corporate hybrids – with the objective of managing the risk/return profile in a context of historically tight spreads and to take advantage of market dispersion. At the same time, dynamic duration management has allowed us to capitalize on rate movements while keeping portfolio volatility under control. Finally, active credit‑risk management – through the tactical use of hedging or derivatives including those that may involve leverage and can amplify gains as well as losses – aligned with our market expectations and combined with rigorous issuer selection aims to manage exposure during different market phases while maintaining upside participation during market rebounds. These approaches involve risks such as capital loss.
What is your outlook for the second half of the year?
We remain constructive while exercising caution in an environment marked by numerous sources of uncertainty: the war in Iran, U.S. trade policy, potentially systemic risks linked to AI, concerns over a slowdown in eurozone consumption, the return of inflation, and others.
However, the macroeconomic backdrop continues to appear relatively resilient, although subject to ongoing volatility and downside risks, which seems likely to persist. The inflationary peak resulting from the blockade of the Strait of Hormuz is expected at this stage not to prompt rate hikes from the ECB, which is looking beyond this temporary inflation shock although monetary policy remains data dependent.
After years of compression, credit spreads in Investment Grade and High Yield may enter a period of relative stability, however, this outlook remains subject to market conditions. In this environment, dynamic management may help to identify opportunities – although such strategies involve risk and may result in losses depending on market conditions – while investors remain exposed to credit and market risks. Issuer selection is expected to remain a key performance driver in a dispersed credit market where risk is primarily idiosyncratic. Higher‑quality issuers may continue to show relatively stronger performance, while selectively chosen weaker credits may offer arbitrage opportunities although they involve default risk and potential loss of capital.
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