What happened last week?

Central banks

While the members of the Federal Reserve are currently in a blackout period until the June FOMC meeting, during which decisions will be released on Wednesday, the market is highly anticipating a pause in the Fed's actions, with probabilities exceeding 75%. On Thursday, the European Central Bank (ECB) will also announce their decisions, and the market expects a 25 bps hike, with probabilities standing at 95%. However, the previous week brought unexpected developments as both the central banks of Australia and Canada raised their interest rates by 25 basis points. The Reserve Bank of Australia (RBA) increased rates to 4.1% as the RBA Governor stated that although inflation may have reached its peak, there are still indicators suggesting a persistent inflationary trend. Simultaneously, the Bank of Canada (BoC) resumed its interest rate hikes after a pause declared in January. They raised rates by 25 bps to 4.75%. Governor Macklem cited the Canadian economy's strong momentum, driven by robust consumer demand for goods and services, as well as an upswing in housing activity, which necessitated measures to curb inflation and bring it back to the 2% target.



Despite the absence of major data releases in the US, rates ended the week on a higher note. The 10-year US Treasury yield rose by 5 bps to 3.75%, while the US yield curve (2s/10s) flattened to -86 bps, reaching its most deeply inverted level since before the regional banking crisis. This upward trend was reinforced last week by the unexpected rate hikes by the BoC and the RBA. Although the market expects the FED to refrain from hiking rates at its June meeting, the UST 2-year yield climbed 10 bps to 4.6%, reaching its highest level since the SVB failure. Despite experiencing negative returns for the past two years, US Treasury bonds have only risen by 1.8% year-to-date, retracing from a total return of over 4% in less than two weeks ago. The technical analysis on US 10-year yields suggests a pivotal point, with a golden cross and declining yield channel favoring lower yields. Currently, the 10-year yield is below the channel line at around 3.80%, but if it surpasses this level, risks will begin to shift higher. The decisions of the FOMC and the US CPI could set the tone for the beginning of the summer. In Europe, peripheral bonds continue to outperform the market, as the spread between Italian and German 10-year yields broke down to 170 bps for the first time since June 2022. The German 10-year yield ended the week at 2.38%, rising by 7 bps, while the 2-year yield jumped by 12 bps to 2.92%. Additionally, the EUR swap curve is continuing to tighten against the German curve, with the difference between their respective 10-year yields now at 0.6%. 


Credit markets continue to benefit from the prevailing positive sentiment in risk assets. Despite negative returns in rates, both European and U.S. high yield bonds have experienced an increase of approximately 1% since the beginning of the month. European high yield spreads have tightened by 30 basis points in June, currently at 465 basis points. The market appears to have absorbed the impact of the Credit Suisse failure and the solution proposed by Swiss authorities, while the weak Eurozone GDP release did not raise significant concerns. In the Investment Grade sector, we observed some divergence last week. European IG bonds had a slight negative return (-0.2%), but still outperformed European treasury bonds (-0.4%). In the U.S., the situation was more mixed, with credit spreads widening by 5 basis points. This increase was largely driven by a highly active IG primary market, which witnessed nearly $50 billion of issuance. It marked the fourth busiest week year-to-date and the second highest in terms of the number of issuers. Following a substantial rebound in May (+2.4%), the iBoxx Europe AT1 index has continued its upward trajectory, rising by more than 2% in June. This positive trend has opened the market to exotic deals, including the upcoming issuance of a new AT1 bond by the Bank of Cyprus.


Emerging market

Similar to high beta fixed income segments, the Emerging Market (EM) fixed income sector has seen a strong start to June, with the three major components of the EM market in positive territory. The best-performing segment thus far is EM local debt, which has gained +1%, driven by the weakness of the US dollar following a strong month of May. EM hard currency sovereign and corporate bonds have also performed well, with increases of +0.9% and +0.3% respectively in June. Turkish fixed income assets have particularly thrived since Erdogan's re-election, with the Bloomberg EM Turkey corporate bond index up +2.6% in June. Additionally, the spread of 5-year Turkey CDS has tightened by 50 basis points. In China, the real estate sector continues its rebound, with the iBoxx USD Asia ex-Japan China real estate index now up more than 10% since the beginning of the month. It is worth noting that EM corporate spreads have reached 356 basis points, the lowest levels seen since the US banking system crisis.

Our view on fixed income (May)


We favor the front end and intermediate part of the yield curve, as they offer favorable carry and benefit from improving rate fundamentals. However, caution is advised when considering the long end, given the historical level of yield curve inversion. we are upgrading our preference from unattractive to cautious on EUR core, CHF, and GBP yield curves, considering that the tightening of monetary policies is nearing its end.


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

The European Additional Tier 1 (AT1) bond market shows a remarkable rebound following the Credit Suisse failure!!



Source: Bloomberg

Ironically, it was on the day that all Credit Suisse bonds were renamed as UBS on Bloomberg that the iBoxx CoCo EUR liquid AT1 index managed to fully recover from its losses since the initiation of the Credit Suisse collpase. Year-to-date, the index has surged by over 2%, underscoring the resilience of this asset class. The European authorities have effectively contained the spillover effects of the failures of Crédit Suisse (Switzerland) and Silicon Valley Bank (USA) on the European banking system. Given the improved conditions, is it time to reconsider investment in this fixed-income segment?


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