Gaël Fichan

Head Fixed Income & Senior Portfolio Manager

What happened last week?

Central banks

As we progress further into 2024, a shift toward a global cycle of interest rate reductions is becoming more apparent. Central banks like the ECB, SNB, and BoC have already started to lower rates, and the Federal Reserve is inching closer to its first reduction. During the ECB’s annual forum in Sintra, Fed Chair Jerome Powell recognized the progress towards the inflation target and noted the cooling labor market, hinting at the possibility of future rate cuts if economic conditions allow for a less restrictive monetary policy. He pointed out ongoing inflation in sectors such as insurance and rents, underscoring the need for careful policy adjustments to maintain economic stability. Christine Lagarde, President of the ECB, suggested a pause in rate cuts for July, with potential further reductions in September, advocating for a cautious stance. At the Fed’s June meeting, officials noted that the American economy might soon be in a position to justify a rate cut, especially if more evidence of declining inflation appears. Despite maintaining the current rate at 5.5%, the discussions were optimistic, fueled by a weak consumer price index in May and potential economic uplift from AI technologies. The approach to cutting rates remains prudent, with a balance of opinions among officials—some call for patience, while others do not discount the possibility of future hikes if inflation resurges. Market sentiment has adjusted accordingly, with a 75% probability now seen for a rate cut in September, up from 60% the previous week. Across the Atlantic, ECB Governing Council member Madis Muller voiced that any potential rate cuts should be approached with caution due to persistent high inflation and strong wage growth. Speaking from Portugal, he emphasized the importance of patience and a gradual approach to policy changes. Despite recent rate cuts, Muller warned of the risks of underestimating inflation's stickiness and predicted the ECB's policy would likely remain restrictive for some time, even if further cuts occur. His colleague, Pierre Wunsch, echoed this sentiment, stating he would need strong evidence of inflation approaching the 2% target to support more than two rate cuts this year. He noted that while initial cuts could be more straightforward if inflation stabilizes around 2.5%, any further reductions would demand clear signs of decreasing inflation. Wunsch highlighted the importance of basing any additional cuts on solid data, likely timed with quarterly economic projections. This cautious yet forward-looking approach underscores a significant juncture in global monetary policy, marking a shift from a period of rate hikes to a more nuanced strategy of rate management. Notably, June 2024 marked the first month since October 2020 without any global central bank increasing rates, indicating a pivotal change in the monetary policy landscape.


Last week, the corporate bond market demonstrated resilience, particularly influenced by strong U.S. Treasury performances. The Vanguard USD Corporate Bond ETF appreciated by 0.4%, reflecting a healthy appetite among investors. In the U.S. investment-grade sector, spreads tightened to 90bps, improving by 4bps, while the high-yield sector enjoyed notable success; the iShares Broad USD High Yield Corporate Bond ETF surged by 0.9%, contrasting with the more modest gain of 0.3% observed in the Bloomberg US High Yield Index, which experienced a slight spread widening of 5bps to 314bps. Europe mirrored this positive trend, with the iShares Core Euro IG Corporate bond ETF gaining 0.4% over the week. European corporate bonds, measured by the Bloomberg index, saw spreads tighten significantly by 12bps to 108bps, reaching their lowest since February 2022. This performance benefited from subdued concerns following the French elections and favorable market conditions characterized by robust inflows and a marked reduction in issuance volumes. June saw a decrease in IG issuance compared to May, but 2024 remains robust with a half-year issuance nearing EUR 400 billion—the highest since 2020—and high yield issuance also showing strength. The high yield sector in Europe also thrived, with the iShares Euro HY Corporate bond ETF increasing by 0.7%. The European Xover index tightened by 25bps over the week, falling below 300bps for the first time in a month. The AT1 segment experienced the most significant gains, with the WisdomTree AT1 CoCo Bond ETF rising by more than 1% weekly and nearly 5% year-to-date, signaling that concerns from the French elections have substantially diminished, reflecting a robust recovery in investor sentiment in European credit markets.


In the US, the bond market experienced a bull steepening last week, with the 2-year US Treasury yield falling by 14bps, while the 10-year yield decreased by 11bps. This shift was significantly influenced by Jerome Powell's speech at the Sintra Forum in Portugal and worsening US economic indicators, with the Citi US Economy Index plunging to its lowest point in 2022. Amid these developments, the June Employment report underscored a slowdown in the job market, with unemployment rising to 4.1%, the highest since November 2021. Despite this, the iShares 3-7 Year Treasury Bond ETF managed a gain of +0.65 for the week. Interest rate volatility remains high, with the MOVE index hovering near 100. In the UK, the political shift following Labour's victory hasn't stirred the gilt market significantly, as memories of the 2022 crisis under Liz Truss prompt a cautious approach toward expansive fiscal policies. The 10-year UK Gilt yield fell by 7bps to 4.12%, reflecting increased investor confidence in the new government's fiscal prudence. Additionally, expectations are growing for an earlier start to monetary policy normalization by the Bank of England, possibly by August or September. European bond markets are also performing well amid signs of a slowing economic recovery and ongoing disinflation. Despite a general rise in German government yields, peripheral rates have fallen, with the spread between the 10-year Italian and German yields narrowing by 20bps to 137bps. In Japan, the 10-year government yield reached a decade-high of 1.10%, steepening the yield curve to a level not seen since 2011. This comes ahead of a crucial Bank of Japan meeting set for July 31, where adjustments to bond-buying strategies are anticipated. Meanwhile, a recent auction of 30-year Japanese sovereign debt saw modest interest from investors, reflecting concerns about the central bank's future moves.

Emerging market

Emerging markets kicked off the second half of 2024 on a strong note, as evidenced by a 0.5% gain in the Bloomberg EM Aggregate Bond Index. Leading the performance, the iShares Emerging Market Sovereign Bonds ETF surged by 1.6% due to its extended duration, while the iShares Emerging Market Corporate Bonds ETF also saw a notable increase of 0.7% over the week. The appreciation of local currencies, particularly the Brazilian Real and the Mexican Pesos, significantly bolstered EM debt denominated in local currencies. In Latin America, economic indicators were encouraging, with the S&P Global Brazil Manufacturing PMI index climbing to 52.5 from 52.1 in May, and Uruguay’s unemployment rate falling to 8.5% in May. This week, attention turns to the Peruvian central bank's upcoming decision and the release of monetary policy minutes from BANXICO. The VanEck J.P. Morgan EM Local Currency Bond ETF mirrored these positive developments, rising by 1.5% over the week. In Asia, tensions heightened as the EU imposed provisional duties on electric vehicles imported from China, contributing to a slight rebound in the 10-year Chinese Government bond yield from a historic low of 2.2% to 2.26%. In response to a surging bond rally, the Chinese central bank announced plans to sell hundreds of billions of yuan in government bonds to cool the market. This decision aligns with the record lows reached by onshore 5-year AAA rated corporate spreads, as domestic investors continue to heavily invest in bonds amid economic uncertainties. Furthermore, Romania's National Bank (NBR) became the latest in emerging markets to initiate a policy easing, cutting the policy rate by 25bps to 6.75%. This marks the first rate reduction since January 2021, signaling a cautious yet significant shift in the region’s monetary policy stance, reflecting a broader trend of easing among emerging market central banks as they adapt to global economic shifts.

Our view on fixed income (July)


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

Is a Fed Rate Cut on the Horizon Before the Elections?


Source: Bloomberg

Recent economic data has underperformed, especially in the job market, and Fed Chairman Jerome Powell's dovish remarks at the Sintra Forum have shifted market expectations. Investors are now anticipating a possible rate cut as early as the Fed’s September meeting, ahead of the US Presidential Elections. This sentiment is clearly reflected in the yield curve. Over the past three days, the spread between the 3-month and 2-year US Treasury yields has sharply declined from -60 bps to -78 bps. This drop signifies a 75% probability that the market is pricing in a rate cut by September. The key question remains: Will the US macroeconomic landscape deteriorate sufficiently to prompt the Fed to start normalizing its monetary policy before the US Presidential Elections?


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