LDI 2025 - A roadmap for European asset owners

HIGHLIGHTS

The evolving market dynamics of 2025 are set to redefine the landscape for insurance portfolios, with diverging monetary policies, rising geopolitical risks, and the increasing importance of energy transition risk at the forefront. In this outlook, Generali Asset Management’s LDI investment team explores strategic approaches to address these challenges, from optimizing duration and spread management under Solvency II to leveraging private assets for enhanced yields and stability.

• The recent transatlantic spread widening reflects divergent US and Euro Area economic paths, creating opportunities in euro government bonds and credit curve steepening.
• LDI portfolios must balance duration and spread duration positioning. Assessing the right entry level on credit and rates, while looking at opportunistic tactical hedging will be key for yield enhancement and Solvency II efficiency.
• Rising geopolitical risk in the Euro Area suggests diversified sovereign strategies and alignment with EIOPA portfolio metrics to ensure solvency stability.
• Transitioning to low-carbon investments will mean balancing ESG opportunities with legacy high-carbon yields amid evolving solvency II regulations.
• Private assets continue to offer stable income and diversification, provided careful due diligence and expertise to mitigate risks and optimize returns.
   

The recent widening of the transatlantic spread points to a remarkable divergence between the US and the euro area (EA) economies. In the EA, subdued survey data, tariffs threats, and lower growth, coupled with political risks, point to a much steeper path of easing compared to the Fed. While this is reflected in repriced terminal rates across the Atlantic, any pull back in US rates, leading to a corresponding adjustment in EA rates, would create an attractive entry point for European government bonds (EGBs). Meanwhile, we see scope for further steepening in Euro rates. 
On the geopolitical front, a further spread correction in France is likely to be needed to shift more debt to domestic investors.
Beyond sovereigns, Euro investment grade credit remains an appealing carry opportunity, supported by sound technicals and resilient fundamentals. 
In this context, we think the credit curve steepening should be monitored to extend the spread duration of portfolios, given heavier capital requirements for insurances portfolio under Solvency II. We are looking for an additional 20 bps of steepening as a fair entry point. 
While Euro high yield remains well supported by supply/ demand dynamics, historically stretched valuations require an extremely disciplined issuer selection over the medium term.