Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

Former Federal Reserve Bank of St. Louis President James Bullard has hinted that US monetary policy easing might be slow, sparking some hope for a potential rate cut in September due to the latest encouraging inflation figures. Echoing Bullard’s cautious optimism, Patrick Harker, President of the Federal Reserve Bank of Philadelphia, suggested that based on current data, a single rate cut might be appropriate in 2024. However, he emphasized the need for more positive inflation data over several months before any rate adjustment. Despite these discussions, the Fed has recently revised its interest rate forecasts, now expecting fewer cuts in 2024 but more in 2025, showing a strategic delay in easing. Interestingly, while the Fed signals caution, market expectations still lean towards almost two rate cuts in 2024, beginning in November. Across the Atlantic, Klaas Knot of the European Central Bank's Governing Council has proposed aligning interest rate decisions with the quarterly release of economic projections to adapt to high uncertainty and the need for a data-dependent approach. The International Monetary Fund (IMF) has advised the ECB to lower its key interest rate to a neutral level of 2.5% by the third quarter of 2025 to meet inflation targets set for the latter half of next year. Despite this guidance, the market anticipates another ECB rate cut in October and sees a 75% chance for an additional cut in December. In the UK, amidst political upheavals and high service sector inflation, the Bank of England (BOE) has postponed any rate cuts, maintaining the benchmark rate at 5.25%. Governor Andrew Bailey is waiting for more conclusive data, with significant policy directions expected to be revealed in the BOE's forecasts in August. In Switzerland, the Swiss National Bank has reduced its key interest rate to 1.25%, following a cut in March, reflecting moderated inflation pressures and a subdued growth outlook. This decision likely marks the end of rate cuts for the year, with the SNB considering its current policy as "neutral" concerning inflation and economic activity. Finally, in Japan, the Bank of Japan (BOJ) maintains its interest rates but plans a significant cut in its bond-buying program, set to be detailed in their July meeting. This decision aims to allow more market-driven determination of long-term yields, especially as the Ministry of Finance proposes increasing shorter-maturity bond issuances to manage refinancing and interest risks better.


In the credit markets last week, performance was somewhat subdued as investment-grade bonds struggled against a backdrop of unhelpful rate movements and widening credit spreads. The Vanguard USD Corporate Bond ETF dipped by 0.35%, reflecting a spread decompression of 4 bps in the CDX IG index and a 2 bp widening in IG cash indices to 94 bps. On a brighter note, the high-yield segment showed some resilience; spreads in both cash and synthetic indices tightened by 4 bps, helping the iShares Broad USD High Yield Corporate Bond ETF to notch a gain of 0.4%. Despite this overall positivity in high yield, the CCC-rated segment of the market deteriorated, with CCC spreads reaching a three-month high. May proved to be supportive for the high-yield market as default rates in the US for high-yield bonds and leveraged loans declined to 3.6% and 5.9% respectively, down from April's figures of 4.2% and 6.3%, according to BNP. Nonetheless, the six-month annualized default rate for US loans remains high at 7%, and the disparity between this rate and that for high-yield bonds has widened to 4.1%, marking the largest margin since 2017. European credit markets offered a more stable picture last week, with spreads generally stabilizing. The iShares Core Euro IG Corporate Bond ETF held steady, while the high-beta segments of the market showed signs of recovery. The iShares Euro HY Corporate Bond ETF increased by 0.2%, and both the Invesco Euro Corporate Hybrid ETF and the WisdomTree AT1 CoCo Bond ETF improved, gaining 0.2% and 0.4% respectively. This positive shift in European credit was accompanied by a significant uptick in trading volume for iTraxx CDS indexes, which reached a year-to-date high of $15.8 billion per day this month—more than double the volume of May, as political uncertainties heightened, and market participants increased their hedging activities. In Switzerland, the credit market experienced favorable conditions, driven by the recent drop in interest rates. The iShares Core CHF Corporate Bond ETF (CH) captured a gain of 0.4%, benefiting from the easing monetary environment and the subsequent positive impact on bond prices. This week in Swiss credit highlights how rate cuts can buoy market sentiment and improve bond performance, providing a breath of fresh air in an otherwise uncertain global financial landscape.


The landscape for government bonds was relatively quiet last week amid mixed economic signals that failed to provide a clear direction. In the U.S., the Citi Economic Surprise Index dipped to its most negative level since 2022, with a notable decline in hard real data, the most significant since September 2022, contrasted by a slight improvement in soft survey data from nine-year lows. Reflecting this uncertainty, the iShares 3-7 Year US Treasury Bond ETF saw a minor decline of 0.1%. Yields on the 10-year US Treasury nudged up by 2 bps to 4.25%, while the front end of the curve saw a slight increase of 3 bps. The MOVE index, which tracks interest rate volatility, dipped back below 100, indicating a decrease in volatility expectations. Over in Europe, the momentum for economic recovery seems to be waning, as indicated by the Citi Euro Economic Surprise Index turning negative for the first time since January. The political landscape in France, stirred by upcoming legislative elections, exerted pressure on bond markets. This was reflected in the spread between 10-year French and German government yields, which widened to 79 bps—the highest since 2012. Additionally, the spread between French and Portuguese 10-year yields turned positive for the first time in nearly two decades. The 10-year French government yield climbed to 3.21%, marking its highest weekly close since November 2023. Amidst this, the iShares EUR 3-7 Year Government Bond ETF recorded a slight loss of 0.1%. In Switzerland, recent rate cuts have spurred a positive performance in the domestic bond market. The iShares Swiss Domestic Government Bond 3-7 ETF rose by 0.5% over the week. Swiss yields saw significant declines, with the 10-year Confederation yield closing at 0.67%, its lowest for 2024, and the 2-year yield dropping to 0.85%, the lowest since December 2022. This reflects a broader trend of easing yields amid ongoing adjustments in global monetary policy and economic outlooks.

Emerging market

Markets: Last week, the emerging markets fixed income sector showcased strong performance, particularly in local currency bonds. The VanEck J.P. Morgan EM Local Currency Bond ETF saw an appreciable gain of 0.8%, buoyed significantly by robust results from Mexican government bonds, which surged 3.6% on a US Dollar basis. This surge was largely influenced by reassurances from Claudia Sheinbaum, Mexico's president-elect, who recently detailed her strategy to boost industrialization through a nearshoring approach aimed at enhancing investment attractiveness. Sheinbaum plans to establish a national council for regional development and relocation, involving the Secretary of Economy, to develop industrial hubs across Mexico. This strategy intends to integrate foreign investments with domestic value chains, maximizing the economic benefits across the board. In terms of hard currency bonds, emerging markets also fared well last week. Corporate spreads in emerging markets tightened by 2 bps to 214 bps, while sovereign spreads held steady at 326 bps. These movements contributed to modest gains in related ETFs; the iShares Emerging Market Corporate Bonds ETF inched up by 0.05%, and the iShares Emerging Market Sovereign Bonds ETF improved by 0.1%. However, Asian bonds didn't mirror this positive trend, with the Investment Grade Asia credit experiencing a slight downturn of 0.1%, and the iShares USD Asia High Yield Bond ETF declining by 0.2%. The primary market saw notable activity from Brazil, marking its return with a new issuance of a $2 billion 7-year bond priced at 6.125% in US Dollars, its first such issuance since January. This move indicates a renewed confidence in accessing the international debt markets amidst varying global economic conditions. Overall, the emerging markets' resilience and positive trajectory in both local and hard currency segments highlight their ongoing appeal to investors looking for diversification and potential growth in a complex global financial landscape.

Our view on fixed income (June)


For government bonds with maturities of less than 10 years, we turn positive. This position is supported by the presence of high real yields, an anticipated peak in central bank’s tightening, a shift towards disinflation, their relative value when compared to equities, and an improvement in correlations. On the other hand, we exercise caution towards bonds with maturities exceeding 10 years. The presence of an inverted yield curve and negative term premiums diminishes their appeal, especially amidst ongoing interest rate volatility.


Investment Grade
We are more cautious on IG corporate bonds. The sharp tightening in credit spreads, reaching lowest level since 2021, has considerably reduced the margin for safety in credit. Spreads now represent less than 20% in the total yield of an investment grade bond. This “price to perfection” encourages us to be more vigilant in this segment.
High Yield

High Yield (HY) could come under pressure in this 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 spread of U.S. HY bond narrowed below 300bps, its tightest point since January 2022. This current valuation of U.S. HY spreads implies modest default rates and the absence of inflation slippage, or a near-term recession. We see more value on subordinated debts over High Yield. 

Emerging Markets
We have turned negative on Emerging Marke debt, driven by the strength of the dollar and rising US real yields. EM corporate spreads have reached very tight levels, which considerably reduces the margin of safety. Additionally, there are persistent negative capital flows and an increase in short interest in USD-denominated EM debt, indicating growing market pessimism. However, we still see value in bonds with maturities of up to 4 years and yields exceeding 6.5%.

The Chart of the week

France's Borrowing Costs Eclipse Portugal's!


Source: Bloomberg

For the first time in nearly two decades, financing costs for France have surpassed those of Portugal, marking a significant shift in the European bond market. This development primarily stems from the immediate uncertainties surrounding the French legislative elections, which have exerted considerable pressure on French government bonds, driving yields higher and increasing financing costs. Conversely, this situation also underscores the substantial economic improvements made by countries like Portugal and Greece, which have both been recognized by the market and rating agencies with upgraded investment-grade statuses. As France faces potential downgrades from rating agencies due to rising financing costs, this chart prompts a critical question: Will the increasing burden of borrowing continue to impact France’s credit rating and further narrow the financial disparity between France and other peripheral EU countries?


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