What happened last week?

Central banks

As the next FOMC meeting approaches within 10 days, the Federal Reserve has entered the pre-meeting blackout period. In the latest update, Philadelphia Fed's Harker highlighted that the US central bank is nearing the point where it can pause interest rate hikes and maintain a steady rate to combat inflation. Despite a robust US May job report, the market currently anticipates a pause in the June meeting with a probability of around 70%, while projecting minimal chances of a rate cut by the end of the year. In Europe, the swap market demonstrates strong confidence, with an 85% probability, in the likelihood of two additional interest rate hikes taking place in June and July. This sentiment aligns with ECB Governor Gabriel Makhlouf's recent confirmation, as he reiterated that rate increases can be expected during those months. Shifting focus to the UK, the SONIA market prices in three more rate hikes (June, July, and September), which would bring the Bank of England's key rate to 5.25%.



In the United States, May experienced a notable increase in yields, with an average rise of 25 bps. This rise was supported by the extension of the US debt ceiling, which mitigated a significant downside risk to the growth outlook. The front-end of the U.S. Treasuries yield curve saw a particularly pronounced surge, resulting in a negative performance of -1.1% for U.S. Treasuries bonds. The calmness of the previous week was disrupted by the release of the US May job report, causing yields to climb by 10/20bps. Additionally, the U.S. yield curve (2s10s) continued to flatten, reaching below -80 bps on Friday for the first time since the Silicon Valley bank crisis. Despite this trend, the MOVE index, which measures Treasury volatility, decreased to 120. In Europe, government bonds significantly outperformed the rest of the market, ending the month of May in positive territory (+0.1%), primarily due to lower-than-expected inflation. Positive news also emerged in Italy, where Moody's maintained their credit rating, resulting in a decrease in the 10-year spread between Italian and German yields to a new low (174 bps) since the Credit Suisse crisis. On the other hand, in contrast to EUR rates, UK rates sharply underperformed (-3.8% in May) due to a strong CPI surprise.


In May, U.S. corporate bonds experienced a negative performance, declining by 1.5%. This decline was primarily attributed to the upward movement of interest rates. The investment-grade (IG) corporate bond market faced its busiest month of primary activity, with a total issuance exceeding $150 bn. This surge in issuance exerted downward pressure on credit spreads, resulting in a widening of 2 bps. In the high-yield (HY) segment, May marked the second month of negative performance in 2023, with a decline of 0.9%. Additionally, the month recorded the highest monthly issuance volume since January 2022, surpassing the $20 bn mark. This increase in issuance volume contributed to a widening of credit spreads by 10 bps. In Europe, the iTraxx Main index, which monitors the 5-year credit default swaps (CDS) of IG corporate bonds, achieved a significant breakthrough by crossing the 80 bps threshold for the first time since the banking stress experienced in March. This development indicates a positive shift in market sentiment and improved confidence in the IG corporate sector. Additionally, both the IG and HY indexes demonstrated positive performance in May, with gains of 0.2% and 0.9% respectively. Furthermore, the iBoxx Europe AT1 index continued its upward trajectory, recording an additional 1% gain in the past week, following a substantial 2.4% gain in May. This sustained growth reinforces the strength and attractiveness of the AT1 market in Europe.


Emerging market

Both the Hard and Local currency EM bond indexes reported negative performance in May, with respective declines of -0.9% and -1.4%. This downward trend was primarily attributed to higher U.S. interest rates impacting hard currency EM bonds and a strengthening U.S. dollar affecting local currency bonds. However, last week brought a notable rebound for EM bonds, with a performance of +0.8% and +0.5% for Hard and Local currency bonds respectively. In a remarkable turnaround, Turkey's 5-year CDS (Credit Default Swap) has already returned to pre-election levels just days after Erdogan's re-election. The appointment of M. Simsek as Minister of Treasury and Finance signals a positive shift towards a more conventional economic approach, which has bolstered market confidence post-election. Meanwhile, China's real estate sector halted eight consecutive weeks of losses and attempted a rebound with a significant increase of 9%. This positive momentum was driven by news that China is actively working on implementing a new set of measures to support the property market. Overall, these recent developments highlight the dynamic nature of the EM bond market, with both challenges and opportunities shaping the performance of different segments.

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

European Investment Grade bonds ride the wave of positive momentum!


Source: Bloomberg

The iTraxx Main index, which monitors the 5-year credit default swaps (CDS) of IG corporate bonds, achieved a significant breakthrough by crossing the 80 bps threshold for the first time since the banking stress experienced in March. This development indicates a positive shift in market sentiment and improved confidence in the IG corporate sector. This achievement in the credit market raises an important question: Is the market too complacent with the current situation, or does it suggest that a soft landing has become the baseline scenario?


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