Since the end of February, global credit markets have been driven by the escalation of the US-Iran conflict and rising tensions across the Middle East. While geopolitical risks are not new, the intensity and speed of this episode took markets by surprise.
The closure of the Strait of Hormuz pushed brent crude price up to $118 per barrel[1] at the end of March, levels not seen since the onset of the war in Ukraine. This has reignited inflation concerns at a time when growth is already slowing, and fiscal positions remain stretched across developed economies.
In response, central banks have reassessed their policy paths. In Europe and the UK, expectations have shifted away from rate cuts towards a more cautious stance, with renewed discussions around tightening. In the US, the Federal Reserve has moved from anticipating cuts to signaling a prolonged pause, with even the possibility of further hikes.
This evolving backdrop highlights the growing tension between supporting economic activity and containing inflation. Government bond yields reacted accordingly, with 10-year rates rising by approximately 30 to 40 bps across the US and core European markets over the month[2].
Subordinated financial debt markets, including AT1[1] and Tier 2[2] instruments, experienced heightened volatility in this environment, with periods of sharp price movements.
However, the repricing has remained orderly. In our view, spread widening reflects a normalization of risk premia rather than a deterioration in credit fundamentals or market functioning. Importantly, there has been no evidence of forced selling or liquidity stress, in contrast with previous episodes in the asset class.
From a valuation perspective, the adjustment in March has been meaningful but contained. AT1 spreads widened by approximately 45 bps[3], while Tier 2 spreads moved by around 20 bps[4], compared to roughly 15 bps for the broader Euro Investment Grade market[5]. This move occurred from historically tight levels, with Euro AT1 spreads close to 250 bps at the end of February, and still well below past stress levels.
At the same time, the rise in interest rates has amplified price declines. This has led to a significant reset in yields: at end-march, Euro AT1 offered close to 6%[6] yield-to-worst, compared with below 5%[7] previously, while Tier 2 yields remained slightly above 4% for both banks and insurers. This repricing materially improves the carry profile of the asset class without reflecting weaker fundamentals.
Primary market activity has remained subdued, reflecting issuer caution. No Tier 2 transactions were brought to market, while AT1 issuance was limited.
Nevertheless, demand remains robust. HSBC, for example, issued a $1.25bn AT1 which attracted an order book of approximately $17 billion[8], confirming that investors remain engaged when pricing is attractive and issuer quality is strong.
Supply dynamics are also supportive. A large portion of expected AT1 issuance for 2026 was already completed early in the year, suggesting limited net supply going forward. In addition, several issuers have confirmed calls at first call date, reinforcing confidence in the asset class and keeping extension risk contained under current conditions.
Investor behaviour has been constructive. Despite volatility, there has been no sign of capitulation or indiscriminate selling, nor excessive risk-taking during rebounds. This reflects a more mature and balanced investor base, reducing the risk of technical dislocations.
Subordinated financial markets are likely to remain sensitive to geopolitical developments and monetary policy expectations in the near term, implying continued volatility.
However, the recent repricing has restored more balanced valuations, while technical factors remain supportive. At the same time, the fundamental backdrop for European banks and insurers remains strong, supported by solid capital positions and resilient profitability.
In this environment, a selective approach remains key. We favor high-quality issuers, robust structures, particularly those with attractive reset mechanisms, and disciplined duration management. Overall, the asset class now offers a more compelling entry point, with improved carry and a more favorable risk-return profile than earlier in the year.
Our subordinated financial bond strategy is well positioned to benefit from the improved carry in subordinated financials while maintaining a strong focus on risk control.
The investment approach is based on rigorous issuer selection and detailed analysis of capital structures. The portfolio maintains a clear bias towards well-capitalized European banks and insurers, whose fundamentals remain robust and provide a solid buffer against potential shocks.
Within subordinated debt, the strategy focuses on instruments offering attractive risk compensation. In AT1, particular attention is given to reset conditions and call incentives, while Tier 2 exposure contributes to stability and diversification.
Duration is actively managed to mitigate interest rate sensitivity, a key driver of recent market performance. The rise in yields has also created opportunities to reinvest at more attractive levels, enhancing forward-looking return potential.
In a market environment combining higher yields, supportive technicals and resilient fundamentals, active management is essential. Candriam’s Subordinated Financial Bond strategy leverages its expertise in financial credit to navigate volatility and capture opportunities across the subordinated financials universe.
Credit can feel calm because returns are steady most of the time. But credit is asymmetric: the upside is limited to the coupon, while the downside can be permanent if fundamentals weaken or liquidity disappears.
[1] Bloomberg CO1 Cmdty Index as of 31/03/2026.
[2] French OAT 10-year (GTFRF10Y Govt), German Bund 10-year (GTDEM10Y Govt), US Treasury 10-year (GT10 govt).
[3] A type of very subordinated debt issued mainly by banks. AT1 instruments are designed to absorb losses in times of stress and can have specific features such as discretionary coupon cancellation or conversion into equity. They usually offer a higher coupon.
[4] Subordinated debt that counts as regulatory capital for banks and insurers. It is less risky than AT1 instruments but still sits below senior debt in the capital structure and therefore offers a higher potential yield than senior bonds.
[5] ICE BofA Contingent Capital Index 27/02/2026 to 31/03/2026.
[6] ICE BofA Euro Financial Subordinated & Lower Tier 2 Index 27/02/2026 to 31/03/2026.
[7] ICE BofA Euro Corporate Index 27/02/2026 to 31/03/2026.
[8] Bloomberg Contingent Capital EUR Total Return Index as of 31/03/2026.
[9] ICE BofA Euro Financial Subordinated & Lower Tier 2 Index as of 31/03/2026.
[10] CreditSight: Euro Banks Coco Database: HSBC AT1s Added published 18/03/2026.
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