We believe there are 3 main reasons that warrant exposure to this bond segment:

• Regulatory changes emerged after the financial crisis. They aim to improve capital buffers, solvency and liquidity for banks (Basel 3) and insurance companies (Solvency 2) and are good news for lenders. Companies are still adjusting their capital structure to meet new regulatory requirements and issuing new quasi-equity instruments to replace previous instruments by calling them in early.
  
  
• Last autumn’s stress-test result provided improved visibility on the direct exposure of these establishments to certain risks.
  
  
• Europe’s QE programme, unveiled on January 22, should also be favourable to subordinated financial debt, as it will reduce funding costs for banks, the main beneficiaries of this accommodating monetary policy. With today’s low interest rates set to last, we estimate that financial debt offers a potentially at- tractive yield of 6% for 20151.

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