The fact that some bond issuances are now oversubscribed by as much as ten times illustrates how sharply market sentiment has shifted. After more than a decade of interest rates close to zero, bonds in the eurozone are once again offering returns, around 3 to 4 percent for investment grade.
According to Gaëlle Mallejac, chief investment officer at Ostrum Asset Management, this is not merely a tactical adjustment, she said in an interview with Investment Officer.
Current spreads may appear historically tight on paper, but that picture is misleading, she emphasizes. Technical factors are playing a decisive role in today’s market environment. When an issuance attracts demand that far exceeds supply, investors who are not allocated immediately reposition themselves into subsequent deals, creating a pull effect that sustains spread compression. “These technical factors are very powerful,” she stressed.
The phenomenon is reinforced by a still-elevated savings surplus in the eurozone, which according to Eurostat can reach up to 15 percent of disposable income. These funds continue to flow into bond markets, maintaining persistent buying pressure.
But this snowball effect is not without consequences for investors. Massive oversubscription and the almost automatic repositioning into subsequent issuances lead to spread compression that can become detached from fundamental risk. In the short term, this supports performance, but it also reduces safety margins. The risk lies less in an immediate deterioration of credit quality than in an abrupt correction if inflows were to slow. In a market heavily driven by liquidity, prices can temporarily diverge from fundamentals, potentially causing correction phases to unfold more rapidly.
Markets dominated by flows
This dominance of flows marks a break from previous cycles, in which spreads more directly reflected economic fundamentals and issuer quality. As a result, risk assessment becomes more complex, as it must encompass both fundamentals and market dynamics. For investors, this means adapting analytical frameworks and accepting greater uncertainty in interpreting signals.
The shift is also visible in portfolios. As interest rates rise, investors are extending the duration of their bond portfolios to benefit from once again attractive returns. Whereas bonds previously served to compensate for a lack of yield, the focus is now on capturing clearly visible carry returns. According to Gaëlle Mallejac, this trend is particularly pronounced among insurers. For them, bonds traditionally account for between 50 percent and 70 percent of portfolios, a share that came under pressure during the period of low interest rates and forced them into riskier or less liquid assets. With the return of positive yields, investors are gradually reallocating toward credit, without immediately reaching these historical levels.
Credit regains a structuring role in portfolios
According to Gaëlle Mallejac, this period has led to mismatches between assets and liabilities. With the return of positive bond yields, credit can once again take a central place, rather than serving as an option of last resort. This reallocation also follows a liability management logic: rising rates make it possible to better align bond portfolios with long-term obligations.
This does not mean a return to traditional approaches. “We can no longer manage by objective or by asset class,” she stated. Portfolio construction is evolving toward a more integrated approach, in which decisions are made at the level of the total portfolio. Investors think less in separate categories and make more trade-offs between return, risk, and liquidity.
The return of bonds increases the visibility of returns, but also requires a more granular analysis of their sustainability in a market heavily driven by flows. For Gaëlle Mallejac, this shift is structural: credit is once again becoming an anchor in a more demanding market environment.