Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Central banks are heading into their upcoming meetings with significant market attention and expectations. The Federal Reserve is widely anticipated to hike rates by 25bps, despite signs of progress in inflation. Market participants have priced in this scenario at more than 95%, and former Fed chairman Ben Bernanke has reinforced this view, stating that "it looks very clear that the Fed will raise another 25 bps at its next meeting." He also expressed the belief that inflation will fall more durably to the 3-3.5% range over the next six months as rent increases ease and vehicle prices decline. This puts the focus on the Fed's communication regarding its forward guidance and the potential path of future rate increases. Similarly, in Europe, the ECB is expected to raise rates by 25bps (market expectations priced at 96%) during its meeting. In the UK, recent lower-than-expected inflation data has resulted in a revision of market expectations for the next Bank of England (BoE) meeting. While initial expectations were for a 50bps hike at the next BoE meeting in early August, the market is now divided and pricing an equal chance between a 25bps or 50bps hike. Meanwhile, the Bank of Japan (BoJ) is expected to maintain the status quo during its upcoming meeting as they see little need to act on yield curve control for now.


In the credit market, a sense of calm prevailed this week, as credit spreads remained relatively stable. In the cash market, both US Investment Grade and US High Yield ended the week almost unchanged at 123bps and 379bps, respectively, compared to the previous week. The synthetic market fared better, with Credit Default Swaps (CDS) witnessing tightening, closing at 65bps for the iTraxx CDX IG index and 419bps for the iTraxx CDX High Yield index, representing a reduction of 2bps and 10bps, respectively. In Europe, despite positive inflows in both segments, the situation was similar, with European high yield spreads widening only by 1bp to 445bps, while European IG spreads remained flat at 151bps. European AT1 debts emerged as the best performers, gaining 0.8%, much like the rebound observed in European bank stocks, driven by the solid results of their US counterparts. Lastly, corporate hybrids experienced a flat performance during the week.


US rates experienced little movement this week, with the 10-year US Treasury yield remaining relatively flat above 3.8%. However, the yield curve (2s10s) has returned below -100bps due to a 6bps jump in the 2-year US Treasury yield. This increase was primarily influenced by a rebound in US breakeven rates (inflation expectations) following stronger than expected jobless claims and robust demand in the auction of US 10-year TIPS (inflation protection) on Thursday. Notably, the 10-year US breakeven yield has reached its highest level (2.35%) since March, while the slope of the breakeven yield curve continues to normalize, currently standing at its highest level (+0.4%) since November 2020.In Europe, government bond performance was slightly positive, with peripheral rates outperforming European core rates. The spread between the 10-year Italian and German yields touched 160bps for the first time this month, as the German 10-year yield dropped by 5bps and the 2-year yield decreased by 10bps, resulting in a bull steepening. The UK rate market also showed robust performance this week, driven by progress on inflation. UK government bonds gained +1.5% over the week, with a 25bps drop in the 2-year UK yield.

Emerging market

EM debts had a good week, with positive gains (~+0.2%) for Hard Currency Sovereign and Corporate bonds, while EM local debt suffered (-0.2%) due to the US dollar's retracement. In Latin America, Fitch downgraded PEMEX, one of the largest EM issuers, from BB- to B+, citing concerns over the company's stagnant oil production and recent operational capacity issues amid increasing debt load. The 5-year PEMEX CDS jumped by 50bps to 675bps over the week. The China real estate sector faced negative newsflows again, with Dalian Wanda Group, a developer known for honoring its obligations, facing challenges in raising funds to repay a $400 million bond due in July. Despite the bond's steep plunge, the company is expected to meet its payment obligations in time. China real estate bonds experienced a drop of over 10% this week. In Turkey, the CBT took an important step by raising its key rate by 2.5% to 17.5%, instilling confidence among investors. Turkish CDS for the 5-year period reached a new low, not seen since November 2021. USD-denominated government and corporate bonds in Turkey have demonstrated an impressive performance, gaining +6% in 2023, partly fueled by substantial economic support from the UAE, totaling more than $50 billion. Finally, South Africa's central bank surprisingly paused its longest phase of monetary tightening since 2006, citing persistent inflationary risks. The bank warned that rates could increase further if these risks materialize.

Our view on fixed income (June)

We raise our stance on rates to Positive (from Cautious), reflecting our view that there is now an attractive asymmetry on long-term rates ahead of the expected slowdown in growth and inflation in H2. Long-term government bonds are also attractive from a portfolio construction’s point of view as they provide again diversification for the equity allocation.


Investment Grade

We favor from 0 to 10 years segments due to the steepness of the credit spread curve which fully offset the inverted U.S. Treasury yield curve. Absolute yields are still offering attractive long term entry point. Focus on high quality corporate bonds that have proven their robustness even if money market funds compete the entire credit spectrum.

High Yield


High yield bonds could come under pressure in this very uncertain environment. Recession fears, expectations of higher default rates and one of the most aggressive monetary policies are expected to weigh on this segment. The current valuation of U.S. high yield spreads implies modest default rates and the absence of inflation slippage, or a near-term recession.



Emerging market bonds have rallied impressively, outperforming investment grade US corporate bonds by more than 5% over the past six months. But rising idiosyncratic risks and the tight premium to investment grade bonds make us tactically cautious.

The Chart of the week

US Yield Curve Signals Concerns as it Returns to Historic Low! 


Source: Bloomberg

Ahead of the upcoming FOMC meeting, the US Treasury yield curve has once again dipped below -100bps, driven by a rebound in the front end of the curve. This development has raised concerns as historical data suggests that such an inversion often precedes a future recession. Market participants are closely monitoring the intensity of this inversion and its potential implications for the future of financial markets. While there is confidence in the Federal Reserve's ability to combat inflation, the market remains uncertain about the central bank's determination to maintain elevated short-term interest rates despite the economic challenges.


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