As rate cycles diverge, Atlanticomnium Fund Manager Grégoire Mivelaz sees Europe’s policy stability, alongside the strength of its banks, drawing renewed investor interest.
10 November 2025
Across recent meetings with clients, one theme has stood out: the need to diversify away from US assets. This was not about moving away from the dollar, but about reducing exposure to US markets. Europe consistently emerged as an attractive alternative. Back in May, the incentive to act was low. With Federal Reserve (Fed) funds offering high yields, cash in money market funds felt safe. But as the Fed resumes rate cuts, reinvestment risk is rising, prompting investors to seek new opportunities. We believe Europe is now a compelling destination.
While valuations are tight, that is not necessarily a deterrent. For active managers, expensive markets can present opportunities. As one client put it:
As long as you avoid defaults, maintain strong credit quality and capture high income, you will make money.”
That is precisely our approach. With an average issuer rating of A+, we invest in bonds targeting capital preservation, focusing on strong names. Whether the S&P is driven by AI or the Magnificent Seven, our income should remain intact. That is the appeal of high-quality subordinated debt: strong credit fundamentals combined with attractive yields.
Why Europe
Chart 1: Fed and ECB have started their easing cycle (%)
Source: Atlanticomnium and Bloomberg, as at September 2025. Past and current trends should not be relied upon as an indicator of future trends. The views are those of the manager and are subject to change.
The game changer is central bank credibility. The European Central Bank (ECB) is independent, data-dependent and, crucially, inflation is under control, exactly what long-term asset allocators need. In contrast, the Fed has resumed rate cuts after a nine-month pause, and markets are now pricing in further cuts despite persistent inflation risks. Europe, meanwhile, is in a much stronger position. Inflation is under control, and the EU’s GDP has scope to benefit from fiscal stimulus; Germany alone plans to spend EUR 500 billion over the coming years1. Investor sentiment reflects this strength: the DAX index is up 21% year-to-date (YTD)2.
We believe Europe is a good place to invest. Global investors are increasingly drawn to its stability, opportunity and momentum.
Why European banks
Chart 2: Strong outperformance versus US peers
Source: Atlanticomnium and Bloomberg, as at August 2025. The views are those of the manager and are subject to change. Past performance is not an indicator of future performance and current or future trends.
From a credit perspective, we believe European banks may represent the safest segment within liquid credit. While we do not invest in their equity, equity performance offers a useful gauge of market sentiment. The blue line in Chart 2 tracks the equity prices of European banks, which have surged 100% over the past three years and 45% YTD. What is particularly striking is their consistent outperformance versus US banks, not just this year but over the past three years. Historically, US banks have been viewed as larger and stronger. But sentiment is shifting. In meetings, we find investor conviction around European banks is so strong that we rarely need to make the case for them.
Reasons to own bank subordinated debt today
When it comes to subordinated debt, the numbers speak volumes. Demand in the primary market for Additional Tier 1 (AT1) contingent convertible bonds (CoCos) has reached EUR 250 billion YTD, far exceeding the EUR 42 billion issued and even surpassing the total market size of EUR 220 billion3. This imbalance highlights the extraordinary demand in the primary market, where investor appetite continues to outpace supply. This surge in interest follows the Credit Suisse event in 2023, which prompted a reassessment of the asset class. Last year saw record demand for European subordinated debt, with EUR 210 billion4, and 2025 is on track to materially surpass it. Why? Because the fundamentals are stronger than ever.
There are three powerful reasons to own bank subordinated debt today in our view: yield, rates and technicals.
- Yield: Subordinated debt offers high income from high-quality issuers – a rare combination that delivers high-yield-like returns from investment-grade names.
- Rates: With central banks now cutting rates, the asset class benefits from a supportive macro backdrop, particularly for longer-duration instruments.
- Technicals: Strong and persistent demand continues to support prices, as investors seek income without compromising on credit quality.
Chart 3: Attractive yield levels of subordinated debt (%)
Source: Atlanticomnium and Bloomberg, as at August 2025. The views are those of the manager and are subject to change. Past and current trends should not be relied upon as an indicator of future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.
This chart illustrates the yield of AT1 CoCos from European banks over the past 10 years - denominated in dollars (blue line) and euros (grey line). Investors have been well compensated. However, valuations are now at all-time tights, with signs of irrational exuberance. That is often a signal to proceed with caution. Subordinated debt has historically been cyclical, with tight spreads often followed by widening events such as US-China trade tensions, China slowdown fears, Covid, the Ukraine invasion and Fed rate hikes. These were largely credit-neutral, yet spreads widened nonetheless. So while the sector offers attractive income, we believe now is not the time to be overweight CoCos.
A disciplined, dynamic approach
As active managers, we adopt an active approach across the capital structure. We continue to hold core issuers through the cycle, but actively manage allocations across senior, Tier 2 and AT1 instruments.
Investor appetite for subordinated debt remains strong, but expectations have shifted. Today’s investors want managers who are nimble and transparent. Our quantitative, rules-based method has resonated well, as outlined in our previous article, “Navigating credit markets with a sailor’s mindset ”. Active management is our competitive edge.
Gregoire Mivelaz is a Fund Manager at Atlanticomnium, who co-manages credit opportunities and climate bond strategies for GAM Investments
Sources
1Source: European Commission, “The potential economic impact of the reform of Germany’s fiscal framework”, 19 May 2025.
2Source: Bloomberg, as at 31 October 2025.
3Source: Atlanticomnium and Bloomberg, as at October 2025.
4Source: Atlanticomnium and Bloomberg, as at December 2024.
1Source: European Commission, “The potential economic impact of the reform of Germany’s fiscal framework”, 19 May 2025.
2Source: Bloomberg, as at 31 October 2025.
3Source: Atlanticomnium and Bloomberg, as at October 2025.
4Source: Atlanticomnium and Bloomberg, as at December 2024.